Large Settlement Led to a Big Plot Reveal: The Agreement was Never Executed

Rule 1.5(c) of the North Carolina Rules of Professional Conduct provides protection to clients with its requirement that “[a] contingent fee arrangement shall be in a writing signed by the client.”  In Rossabi Law PLLC v. Greater Greensboro Ent. Grp., LLC, 2021 NCBC 31, the Business Court considered what happens when a client turns the rule against its lawyer to block recovery of a fractional share of a settlement.

Plaintiff represented a defendant entity that operated the Cone Denim Entertainment Center (CDEC), a concert venue in downtown Greensboro. In summer 2017, the City of Greensboro advised that it had purchased property behind CDEC and intended to condemn the access easement and terminate the public parking arrangement that benefitted the property owned by defendant N Club, LLC on which CDEC operated. ¶ 12.  The key dispute before the Business Court arose from a latent dispute about the lawyer-client relationship formed to defend against the condemnation.

The City and N Club entered a review agreement under which the City would reimburse N Club as much as $45,000 for expenses associated the City’s condemnation plan, including potential attorneys’ fees. When the City took its proposed actions a few months later, its Council adopted a resolution that included payment of attorneys’ fees.  Id. ¶¶ 14, 16.  The lawyer-client dispute revolved around the nature of their relationship after the City’s condemnation action.

The Rossabi law firm believed after that point it represented defendants on a contingent basis in legal action against the City over the condemnation and parking termination. The Business Court’s opinion recites that a member of defendant Greater Greensboro Entertainment Group (GGEG) – Rocco Scarfone – asked for the contingent structure, told Plaintiff he would execute the Contingency Agreement that was delivered to him, later indicated he had signed it, and acknowledged the arrangement at a mediation. Id. ¶¶ 19, 22-24.

Scarfone and plaintiff’s managing partner, Amiel Rossabi, had agreed not to tell the City about the contingent arrangement over fears it would dampen their potential recovery at mediation. Thus, they negotiated for the City to pay $85,000 in attorneys’ fees as a term of settlement, with the parties to bear the costs of any other fees and expenses. Id. ¶¶ 25-27. Yet, after the parties reached a mediated settlement of approximately $1 million, the contingent arrangement was promptly more illusory than celebratory.

Defendants alleged that Scarfone could not approve the contingency agreement without agreement of another member, Jeffrey Furr, and stated that neither of them had, in any event, signed it. The about-face was especially notable because Rossabi was also a member of GGEG and had been its legal counsel for more than 10 years. Id. ¶¶ 8, 11. Yet, financial warfare in the entertainment industry is hardly a new script.  As legendary television executive Don Ohlmeyer once observed:

“The answer to all your questions is: Money.”

The Court was thus faced with (i) defendants who allegedly suborned the belief of their counsel and fellow LLC member in a non-existent contingency agreement, and (ii) its own precedent that non-compliance with ethical Rule 1.5 likely dooms a contingent fee arrangement.  See Dunn v. Dart, 731 S.E.2d 274 (N.C. App. 2012) (affirming a Business Court decision that a fee agreement was unenforceable absent Rule 1.5 compliance).

Judge Robinson noted as “erroneous” the claim by defendants that it was undisputed there was no signed contingency agreement. ¶ 51.  The Court observed that whether Scarfone signed the agreement “is a genuine issue of material fact that the Court is unable to resolve without considering the credibility of Rossabi and Scarfone, which is inappropriate” at the summary judgment stage. While Judge Robinson confirmed that plaintiff would still need “to establish the execution and validity” of a contingency agreement, the Court allowed the breach of contract and perhaps more important quantum meruit claims to proceed.  ¶¶ 55-56.

Epilogue:  The Business Court has set a July 8, 2021 video hearing to consider defendants’ reconsideration motion that contends the Court committed “clear error” in interpreting GGEG’s Operating Agreement to grant Scarfone the authority to have executed, alone, a binding contingency agreement that may or may not ever be discovered. Popcorn is optional for that one.

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

As a still-young judicial panel, the Business Court frequently has an opportunity to define its boundaries in the face of challenges to its jurisdictional reach. In Inhold, LLC v. PureShield, Inc., 2021 NCBC 2, the Court considered a trade secret misappropriation fact pattern common to its docket: alleged informational theft and skullduggery among industry combatants. The jurisdictional test came when plaintiffs sought to amend their complaint to include a related dispute about the scope of rights defendant PureShield had obtained from multiple patent licenses.

Defendants claimed that the patent disputes arose under federal law and were thus beyond the Business Court’s jurisdiction. Instead, they preferred resolution of the patent issues in a Middle District of North Carolina action they filed shortly after plaintiffs sought leave to amend the state court action.

The issue before the Business Court was whether a contract dispute over patent enforcement rights nonetheless arose under federal law. The Court noted the United States Supreme Court’s guidance that only a “special and small category” of actions would meet the test for federal jurisdiction to lie over a state law claim, when a federal issue is:

“(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”

Id. ¶ 12 (quoting Gunn v. Minton, 568 U.S. 251, 258 (2013)).

The Business Court acknowledged the defendants identified issues regarding the construction and assignability of the patents that were governed by federal law. ¶¶ 13-14. But the key factor for the Court was whether, aside from these identified issues of patent law, “[T]here are reasons completely unrelated to the provisions and purposes of the patent laws why the party may be entitled to the relief it seeks[.]” Id. ¶ 15. The Court readily identified grounds under state contract and corporate law under which plaintiffs’ claims could be resolved without reference to federal patent law. Thus,

“The upshot is that the Court could grant relief to Plaintiffs on these state-law theories `without ever reaching a patent law issue.’”

¶ 18.

Moreover, the Court held the case did not raise “substantial” issues of federal patent law where the effect of its outcome “would be limited to these patents and these parties.” Here, the contractual relationships of the parties predominated over the implicated provisions of patent law. Id. ¶ 22.


  • A well-pled state law claim arises under federal law “only when every legal theory supporting the claim requires resolution of a federal issue.”

Preemption/Noerr-Pennington Immunity

Plaintiffs’ proposed amendment also raised claims for tortious interference and defamation based on allegations that defendants improperly raised patent rights they did not possess in cease-and-desist letters and other communications to third parties. The Business Court adopted the analysis of several federal courts that such state law claims are not preempted when they rely on allegations of false or bad-faith claims to patents. Id. ¶ 26. Further, Judge Conrad also rejected defendants’ claim that their preemption argument based in federal patent law stripped the Court of jurisdiction over the interference and defamation claims. “Preemption,” the Court reminded, “is a defense and therefore does not create arising under jurisdiction.” Id. ¶ 27 (citing Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988)).

First to File Rule

The Court wryly observed that defendants had not gone so far as to claim that the federal case they filed in the Middle District promptly after plaintiffs sought leave to amend in the Business Court was a first-filed action that should take precedence. A good thing, the Court said, because a defendant should not be able “to bring a declaratory suit involving overlapping issues in a different jurisdiction as a strategic means of obtaining a more preferable forum.” Id. ¶ 33 (quoting Coca-Cola Bottling Co. Consol. v. Durham Coca-Cola Bottling Co., 541 S.E.2d 157, 164 (2000)).

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

In March, the concept of nominal damages (often just a single dollar awarded to a plaintiff to represent a defendant’s liability in the absence of actual damages) took center stage at the highest courts of both the country and this state.  The results in both courts placed a potential value on nominal damages that far exceeds a single dollar.

On March 8, the Supreme Court of the United States issued an opinion holding that a request for nominal damages alone is sufficient to keep a plaintiff’s cause of action for a constitutional violation alive, even if there is no allegation of actual damage and the challenged law or policy has been discontinued.  See Uzuegbunam v. Preczewski.  The decision was notable for a number of reasons, including that it marked the first time in his fifteen years on the Court that Chief Justice Roberts issued a solo dissent.  (In full disclosure, co-author of this blog post Patrick Kane co-authored an amicus brief in that case on behalf of a group of local government advocacy groups.)  Thus, it is now settled that plaintiffs alleging a past constitutional harm need not have suffered any actual damages, and need not have the specter of further constitutional harm, in order to pursue a ruling from a court as to whether their constitutional rights were in fact violated.  The possibility of nominal damages satisfies the redressability requirement of standing and prevents mootness.

A week after Uzuegbunam was released, the Supreme Court of North Carolina in Chisum v. Campagna tackled its own nominal damages question, but in the realm of commercial torts.  Specifically, the Court considered whether state-law claims for breach of fiduciary duty and constructive fraud can be supported by nominal damages alone.  In a seventy-page opinion covering a variety of intracompany disputes and a substantial number of claims and counterclaims, the Court held in the affirmative: a plaintiff does not need to prove actual damages to succeed—and get punitive damages to boot—on a claim for either breach of fiduciary duty or constructive fraud.  Nominal damages alone will suffice.  However, just as the U.S. Supreme Court’s opinion in Uzuegbunam left some questions unanswered (e.g., Can a facial challenge to the constitutionality of a law that was never applied against the plaintiff, and has since been repealed, avoid mootness on the basis of nominal damages alone?  Can a government defendant moot a case by paying the nominal damages into the Court?), the Supreme Court of North Carolina’s opinion in Chisum also furthers some interesting discussion on the nominal damages front.

At its core, Chisum was a dispute concerning ownership interests in three limited liability companies.  The plaintiff, Mr. Chisum, claimed that the defendants, who were also members of the LLCs, systematically froze him out of the companies’ meetings and extinguished his interests in all three LLCs.  In 2016, plaintiff sued to ascertain the status of his membership interests in the three LLCs.  He also brought several other claims against the defendants, including direct and derivative claims for breach of fiduciary duty and constructive fraud.  The defendants successfully moved to dismiss the plaintiff’s direct claims, leaving only the derivative claims to proceed to trial.  At trial, the jury separately considered the breach of fiduciary duty and constructive fraud claims as to each of the LLCs.  Of significance to the appeal, the jury found that with respect to one of the LLCs, Judges Road, the defendants had taken advantage of their position of trust and confidence in a way that benefitted themselves (encompassing the substantive elements of the claims for breach of fiduciary duty and constructive fraud).  However, the jury also affirmatively found that Judges Road had not suffered any actual damages from the defendants’ tortious acts.  Instead, the jury awarded only nominal damages of $1.00—but then tacked on $600,000.00 in punitive damages.

Following the jury verdict, the defendants filed post-trial motions arguing, in part, that judgment should be entered in their favor with respect to the derivative claims for breach of fiduciary duty and constructive fraud because plaintiff failed to prove actual damages arising from those claims.  Additionally, the defendants argued that without proof of actual damages, the jury could not award punitive damages.  The trial court denied the post-trial motions.

Both parties appealed to the State Supreme Court – plaintiff appealing the trial court’s early dismissal of his direct claims, and the defendants appealing the final judgment finding derivative liability for those same torts—breach of fiduciary duty and constructive fraud.  (There were a number of other issues appealed as well; this post focuses only on the two above.)

The Court’s opinion addressed these issues in reverse order, first resolving the defendants’ appeal of the final judgment, and later adjudicating plaintiff’s appeal of the pre-trial dismissal of his direct claims.

The defendants asserted that because there was no record evidence that Judges Road had suffered actual damages, an essential element of the tort claims was lacking and therefore plaintiff (suing derivatively on behalf of that LLC) could not prevail.  According to the defendants, nominal damages alone could not support those claims.

The Supreme Court disagreed.  The Court acknowledged that the issue of whether a plaintiff must prove actual damages to succeed on a breach of fiduciary duty or constructive fraud claim was one of first impression for the Court, but noted that the North Carolina Court of Appeals had addressed the issue several times.  Those lower appellate court opinions had all concluded that nominal damages alone were sufficient to support not only a finding of liability on those claims, but some of those decisions had also held that nominal damages were a sufficient peg upon which a jury could hang punitive damages.  In affirming the trial court’s denial of the defendants’ post-trial motions, the Supreme Court stated:

We adopt the reasoning of the Court of Appeals and hold that potential liability for nominal damages is sufficient to establish the validity of claims for breach of fiduciary duty and constructive fraud and can support an award of punitive damages.  Aside from the fact that nothing in the prior decisions of this Court indicated that proof of actual injury is necessary in order to support a claim for breach of fiduciary duty or constructive fraud, we see no basis for treating the incurrence of nominal damages as a second-class legal citizen in this context, particularly given that such damages do reflect the existence of a legal harm and the fact that the policy of North Carolina is to discourage breaches of fiduciary duty and acts of constructive fraud.

In so holding, the Court pronounced a rule of law for North Carolina that actual damages are not a necessary element of breach of fiduciary duty or constructive fraud claims; the nominal damages that are attendant to any alleged breach or constructive fraud are sufficient for those claims to proceed to a jury and will allow a jury to award punitive damages.

After addressing some additional issues, the Court then reached plaintiff’s challenge to the Rule 12(b)(6) dismissal of his individual claims.  Plaintiff argued that the dismissal was improper because the claims were authorized by Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 324 (1997).

[As a bit of background, shareholders of corporations or members of LLCs typically do not have standing to pursue direct, individual causes of action against third parties for injuries suffered by the entity.  Instead, the shareholder/member may usually only bring claims derivatively on behalf of the entity.  In Barger, however, the State Supreme Court carved out two main exceptions to this rule, thus giving shareholders/members the potential ability to pursue certain direct claims.  Under Barger and its progeny, a shareholder may bring a direct claim against a third party for an injury that directly affects the shareholder if (1) the third party owed the shareholder a special duty; or (2) the shareholder’s injury was separate and distinct from any injury the entity itself sustained.  Here, plaintiff argued that the latter exception was applicable to his claims because the defendants, among other things, attempted to freeze him out of the LLCs and he therefore had an injury separate and apart from the claims of the LLC.]

But the Court never reached a Barger analysis.  Instead, the Court identified a more fundamental problem with plaintiff’s direct claims: he failed to allege any “legally cognizable injury” to support his breach of fiduciary duty or constructive fraud claims to begin with.  The Court noted:

to successfully assert a claim for breach of fiduciary duty, a plaintiff must show that: (1) defendants owed the plaintiff a fiduciary duty; (2) the defendant breached that fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury to the plaintiff.  Similarly, the assertion of a successful constructive fraud claim requires a plaintiff to show that he or she sufferance an injury proximately caused by a defendant’s [acts].

Upon review of plaintiff’s allegations, the Court concluded that his “breach of fiduciary duty and constructive fraud claims fail because of his failure to demonstrate that he sustained a legally cognizable injury.”  Thus, because he did not “show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud,” the Court held that it need not address whether that alleged injury was separate and apart from the damages suffered by the LLCs (i.e., the Barger analysis), and affirmed the trial court’s dismissal.

The Court’s ruling on this issue is seemingly straightforward: if a plaintiff does not allege injury or damage from a defendant’s alleged breach of fiduciary duty or act of constructive fraud, then the claim must fail.  So the question arises:  how does that ruling interact with the Court’s earlier holding on the derivative claims?  In rejecting the defendants’ argument that the trial court should have entered judgment in their favor because plaintiff proved no actual damages, the Court unequivocally held that actual damages are not required for a breach of fiduciary duty or constructive fraud claim—nominal damages alone suffice.  Thus, why would plaintiff’s lack of injury doom his direct claims?  Couldn’t plaintiff at least recover nominal damages if he could prove the defendants’ breach and/or constructive fraud?  After all, the Court held that nominal damages were available on the derivative claims for the same torts and that those nominal damages represented the “legal harm” that existed from the defendants’ alleged acts.  But as to the direct claims, the Court held that plaintiff had not alleged a “legally cognizable injury.”

The opinion’s language makes this issue even more thought-provoking. The Court stated that “in attempting to demonstrate the existence of the requisite injury,” plaintiff claimed that the defendants had attempted to “freeze him out of the LLCs, conducted sham capital calls, acted as if he was no longer a member of the LLCs, and treated him in a manner inconsistent with his status as a member of [the LLCs].”  The Court then explained that “instead of showing the existence of a legally cognizable injury, the facts upon which [plaintiff] relies simply describe the steps that the [defendants] took to deprive [plaintiff] of his ownership interests…and do not show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud.”

But what specifically is the “requisite injury” and/or “sort of injury” necessary to support these claims?  If one reads the earlier holding on the derivative claims to mean that no injury is necessary to support these claims, then one could argue that the alleged acts supporting the direct claims are harmful in their own right, and give rise to nominal damages.  And if that were so, the acts the defendants allegedly took to deprive plaintiff of his ownership interests, if determined to be a breach of fiduciary duty and/or constructive fraud, would entitle him to nominal damages and the claims arguably should have survived dismissal.

So how are these rulings reconciled?  One possible theory is that the potential contradiction can be explained by the distinction between direct claims of an individual and derivative claims of a business entity.  Perhaps the Court felt that plaintiff’s purported allegations of damages or legal harm were really harms felt by the LLCs themselves, and thus not “legally cognizable” to support any direct claims by a shareholder like plaintiff.  Then again, that rationale is reminiscent of the Barger analysis, and the Court expressly disclaimed performing that analysis: “Since [plaintiff] has failed to establish a legally cognizable injury as the result of the [defendants’] conduct, we need not determine whether any injury that [plaintiff] might have suffered was separate and apart from any injury suffered by [the LLCs]”.

Or does the explanation perhaps lie in the standard of review for a pleading versus a jury determination?  After all, nominal damages historically developed in part as a legal fiction to be awarded after a jury found a defendant liable for the acts alleged, but found no actual damages.  Does Chisum follow that path by holding that a plaintiff asserting North Carolina state law claims of breach of fiduciary duty and constructive fraud still must allege actual damages to get those claims to trial, but nominal damages can support a jury verdict (and be a peg upon which punitive damages are hung) if those alleged actual damages ultimately are not proved at trial?  Under this theory, the availability of nominal damages saved the derivative claims in Chisum because there had been allegations of actual damages to get the claims before the jury, but the possibility of nominal damages could not save plaintiff’s direct claims from a motion to dismiss when there were no actual damages alleged to have been caused by the torts from the outset.

Finally, what does this decision mean for future cases with claims of breach of fiduciary duty and constructive fraud outside of the corporate setting—can those claims proceed even in the absence of any actual damages and on the basis of nominal damages alone?  If you have thoughts on any of this, we’d love to hear them in the comments section below.

**Note: After the issuance of the Chisum opinion, the defendants moved the Supreme Court for rehearing, but that request was not based on the issues above—it was based on whether plaintiff’s declaratory judgment claims regarding the LLCs’ operating agreements were barred by the applicable statute of limitations (the Court had held that they were not).  The motion for rehearing was denied.

–Patrick Kane and Ashley Chandler

[This post is cross-posted on Fox Rothschild’s North Carolina Appellate Practice Blog]

What exactly is the “securities transaction” exception to a UDTP claim?  As highlighted by the Business Court’s recent decision in Aym Technologies, LLC v. Scopia Capital Management, LPC et al., 2021 NCBC 20B (N.C. Super. Ct. Mar. 31, 2021), it can be a potent defense against the UDTP claims we see litigated—perhaps too frequently—in the Business Court and elsewhere across the state.

 A.    What is the “Securities Transaction” Exception?

For those unfamiliar with it, the securities transaction exception operates essentially as a defense to a UDTP claim.  Where applicable, it effectively removes the subject transaction from the purview of G.S. § 75-1.1, the statute that creates and governs UDTP claims, by defeating the “in or affecting commerce” element of a UDTP claim.

But why?  The rationale for the securities exception is simple enough: securities transactions are heavily regulated, both federally (under the Securities Acts of 1933 and 1934) and at the state level (under the North Carolina Securities Act).  Given this “pervasive and intricate regulation,” our courts have reasoned that private enforcement under § 75-1.1 (in the form of a UDTP claim) is unnecessary or superfluous.  Skinner v. E.F. Hutton & Co., Inc., 314 N.C. 267, 275 (1985).

Courts also have applied the exception in a second instance—where the transaction in question is an “extraordinary” business event, such as a company’s issuance or redemption of its stock.  HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594 (1991).  The idea is that a UDTP claim requires a transaction “in or affecting commerce,” i.e., “regular, day-to-day business activities,” and extraordinary events are not regular business activities.  See id.  (One might also argue that at least some stock issuance and redemption transactions involve intra-company disputes, which typically fall outside the UDTP sphere because they are not “in or affecting commerce.”  See, e.g., Potts v. KEL, LLC, 2018 NCBC 24 ¶ 33 (N.C. Super. Ct. Mar. 27, 2018) (collecting cases holding that intra-company disputes do not support a UDTP claim)).

Applying these concepts, North Carolina courts consistently have held that transactions involving securities are outside the scope of G.S. § 75-1.1, and consequently cannot form the basis of a UDTP claim.  See, e.g., Skinner, 314 N.C. 267 (conceiving securities exception based on “pervasive” regulation rationale articulated with respect to commodities transactions in Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414 (1978), cert. denied, 296 N.C. 583 (1979)); HAJMM Co., Inc., 328 N.C. 578; Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52 (2001); White v. Consolidated Planning, Inc., 166 N.C. App. 283 (2004); Latigo Investments II, LLC v. Waddell & Reed Financial, Inc., 2007 NCBC 17 (N.C. Super. Ct. May 22, 2007).

A straightforward test has emerged: “the question is whether the transactions at issue involve securities or other financial instruments involved in raised capital.”  White, 166 N.C. App. at 304.  If so, the securities transaction exception applies.  Id.

B.   The Business Court Applies the Securities Transaction Exception in Aym Technologies.

Chief Judge Bledsoe applied the securities transaction exception in Aym Technologies.  (We have previously written on this litigation here.)  The plaintiff there moved to dismiss the defendants’ UDTP counterclaim, which alleged that the plaintiff had “misrepresented and failed to disclose material information” during negotiations that were “for the purpose of raising investment capital.”  Aym Technologies, 2021 NCBC 20B ¶ 58.  The Court made quick work of the UDTP claim, holding that because the alleged misrepresentations had been made as part of the capital-raising process, “the security exception applies.”  Id.

Although seemingly straightforward, the Court’s analysis of the securities transaction exception highlights an important point:  the exception may defeat a UDTP claim if either of the two “rationales” for the exception are present.  The Court indicated as much in addressing the defendants’ argument that the exception should not apply because raising capital was part of their day-to-day business activities (i.e., it was not an “extraordinary” event).  The defendants argued, essentially, that because their capital raising was a regular business activity—and therefore “commerce” within the meaning of G.S. §  1-75.1—the “in or affecting commerce” requirement was met.  The Court disagreed.  It explained that even if capital raising were a regular business activity of the defendants, it did not change the fact that their “investment solicitation of [the plaintiff] and any purchase and sale of investment securities that might have followed [were] likewise subject to extensive state and federal securities regulation.”  2021 NCBC 20B ¶ 59.

Stated differently, and framed in terms of the two “rationales” for the securities transaction exception described above, the Court’s analysis in Aym indicates that the exception will apply to foreclose a UDTP claim if either:  (1) a separate enforcement regime exists (e.g., the NC or federal securities acts) to regulate the subject transaction; or (2) the transaction constitutes an extraordinary event, i.e., is not a regular business activity.  And because the first rationale was present in Aym, the analysis ended there and it was of no consequence whether the second rationale also existed.

C.   What Does This Mean for UDTP Claims?

UDTP claims are frequently litigated in North Carolina, to say the least. As the Aym plaintiff pointed out, courts have taken note of the sometimes detrimental impact of such claims on litigation and even settlement prospects.  See Brewster v. Powell Bail Bonding, Inc., 2018 WL 74 ¶ 36 (N.C. Super. Ct. July 26, 2018) (observing that the “routine addition” of UDTP claims “driv[es] up the cost of litigation, tax[es] the resources of the Court, and expos[es] the plaintiff to a potential award of attorney fees” while “imped[ing] settlement discussions by introducing remedies (including treble damages) that would otherwise be unavailable, thereby distorting the parties’ incentives and their perceived risks”).

Given this reality, any arrow in the defense quiver is valuable not just to the defense but also to the courts in weeding out “add-on” UDTP claims and to the parties in working toward a resolution of their disputes.  The Business Court has reminded us that the securities transaction exception is one such arrow, representing a potent defense against UDTP claims, and at least in this instance that arrow hit its target.


Matt Krueger-Andes is a litigation associate in Fox Rothschild’s Charlotte office.

Discovery in a complex commercial case can feature its fair share of mayhem, particularly where it includes a large document production.  Yet, where parties plan and execute information exchanges with reasonable diligence, the Business Court typically affords considerable latitude.  That’s consistent with the ethic of the Court’s discovery rules – “designed for the parties to set expectations, with reasonable specificity, about what information each party seeks and about how that information will be retrieved and produced.”  BCR 10.3.

Where a discovery dispute extends beyond the pre-filing dispute resolution mechanism in the Court’s rules (see BCR 10.9), a primary objective in Business Court dockets often is to present a narrative of reasonable, if ill-fated disputes.  In Lunsford v. JBL Communications, LLC, 2021 NCBC 14, the Court called out an easy way to lose control of your own story: telling opposing parties and the Court what you think they want to hear, as opposed to the facts and discovery realities they need to appreciate.  As Judge Conrad put it,

When the Court asks for counsel’s guidance, it expects probity, not propitiation.

¶ 33.

In Lunsford, the Court noted that plaintiffs had “assured partial or complete production” on eight different dates over a four-month period, but conceded in later sanctions proceedings “they had no reasoned basis for assuring compliance by any of these dates.”  At a hearing, plaintiffs’ counsel indicated they were “pie in the sky” dates that relied on “blind optimism.”  Id. ¶ 33.  The Court offered a more stark characterization, calling it an “unjustified lack of diligence” and “a lack of candor.”  Id. ¶¶ 32-33.

It didn’t have to be that way.  Parties that find themselves in deep discovery holes will sometimes find after abandoning the shovel that a ladder lies just beyond a substantial cloud of dirt.  In Lunsford, the parties participated in the BCR 10.9 discovery dispute mechanism that includes submission of position summaries to the Court and a discretionary phone hearing.  In considering responses “outstanding for at least five months and as many as nine months,” the Court pointed out the ladder and afforded instructions for climbing: serve the overdue responses, provide a date by which documents would be produced, and provide guidance about what documents plaintiff would produce, could not produce, or refused to produce.  ¶ 8.

Continued digging ensued.  A first sanctions motion resulted in the Court’s conclusion that plaintiffs “had not even begun to search for and retrieve information” from electronic sources that likely held responsive material, nor made determinations about how to preserve, identify and produce such information.  Id. ¶¶ 10-11.  The Court awarded a modest sanction of payment of expenses caused by plaintiffs’ noncompliance, and a new production deadline of 30 days to which plaintiffs did not object based on their retention of a vendor to assist with producing electronically stored information.  Id. ¶ 12.

The aftermath brought four motions to extend the new deadline, but no production.  Ten weeks distant from the sanctions order, plaintiffs’ counsel conceded “he had spent little time on document review and could not guarantee production by any date.”  A week later, counsel indicated at a status conference his only step toward retention of a vendor to assist with the production “was to fill out an online contact form.”  Id. ¶¶ 18-19.  The Court later extended the case calendar by seven months to accommodate renewed production efforts, but at a hearing on a second sanctions motion plaintiffs indicated a 12-week review by its vendor had not yet commenced.  Id. ¶¶ 22-23.

A “habitual failure to live up to their own estimates of the time needed to meet their discovery obligations” led to an evidence preclusion sanction that barred plaintiffs “from introducing evidence” to support their own claims and defenses, as well as to oppose defendant’s defenses and counterclaims.  Id. ¶¶ 32, 34-35.  The Court allowed reasonable expenses, including attorney’s fees, as a monetary sanction but declined requests to declare certain facts as established or to dismiss plaintiffs’ claims.  The Business Court offered a host of evidence preclusion citations, but practitioners may wish to note in particular a Court of Appeals decision that affirmed evidence preclusion in response to evasive discovery conduct and failure to obey orders compelling discovery.  See GE Betz, Inc. v. Conrad, 752 S.E.2d 634 (N.C. App. 2013).

The Court soberly observed that plaintiffs’ own, persistent digging “built a record of disobedience, disregard for the judicial process, and prejudice to their adversary.”  Id. ¶ 38.  For failure to acknowledge and avail themselves of a ladder to escape their discovery excavations, the Business Court decided that plaintiffs would sit in the hole for the duration of the case.


  • The Business Court is likely to honor its ethic of reasonable and efficient discovery exchanges, even as problems arise, but when pushed will sanction parties that fail to right their ways – particularly after judicial invitation to do so.
  • BCR 10.9 provides an avenue for efficient resolution of discovery disputes that can save time and a client’s money, but beware the Court’s recently expressed concern that overuse of this mechanism might lead to appointment of discovery referees for more complex disputes.

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

At the NCBA’s annual Antitrust and Complex Business Disputes Section CLE last week, there was a panel segment of the North Carolina Business Court Judges.  Fox Rothschild was there, and here is our recap of what we heard and learned.  As always, we strive to be accurate reporters, but this is not a verbatim recitation of what was said.  If you want that, however, my understanding is that the CLE will be available on-demand in the coming months.

As always, the Judges were extremely helpful and gracious with their time and insight. They began by reporting on the necessary modifications that the pandemic has forced on their court operations.  Not surprisingly, they have all been fully remote for some time now.  The Judges indicated that virtual hearings have been going well, and the lawyers have stepped up to the technology.  There were no reports of any lawyers appearing in court as a kitten (if you haven’t seen this, check it out).  While there has been a complete pause in jury trials, cases are otherwise generally progressing.

As some may be aware, Judge McGuire has accelerated bench trials.  The Judges indicated that as jury trial backlogs grow, parties interested in exploring bench trials should pursue that, even with judges other than Judge McGuire.  Because jury trials in Business Court cases have to occur in the county where the case was filed, when NCBC jury trials will ultimately resume will depend on a case-by-case and county-by-county basis.

There was discussion of NCBC Rule 10.9 related to discovery motions.  There appeared to be indication that parties in some instances may be over-utilizing the telephonic conference element of that rule, and that in cases where that is occurring the Court may suggest or assign a discovery referee.  The underlying message seemed to be that while this rule is supposed to streamline discovery disputes and conserve judicial resources, in recent practice it has at times had the opposite effect.  The Judges are sometimes finding themselves involved in repeated discovery disputes in cases, with those discovery disputes often submitted for resolution with hundreds of pages of accompanying materials.  It should come as no surprise that the Judges would prefer that counsel for parties make legitimate good faith efforts to resolve discovery disputes and involve the Court through Rule 10.9 judiciously and only when truly necessary.

Motions to dismiss were once again a topic of discussion.  Back in 2019 at a similar Business Court Judge’s panel, Judge Conrad discussed his preference for parties seeking to consult and perhaps narrow claims outside of the motion to dismiss process, or as a part of the process that resulted in amended complaints being filed without the Court’s involvement.  Motions to dismiss are still posing significant burdens on the Court, especially when they are not likely to resolve the case due to factual issues.  So while the Judges did not specifically state this, a takeaway could be that defendants considering filing a motion to dismiss should undertake an analysis of whether the motion will actually change the scope of the case in any significant way.  If a partial grant of a motion to dismiss or a grant of a partial motion to dismiss will not impact the ultimate liability the defendant is facing and/or change the nature of discovery that will be necessary, then is that motion really worth filing?

Other motions were also discussed, such as motions for extension of time.  The Judges noted that for agreements between parties to extend the time for discovery responses, those do not need to be filed with the Court.  However, any motions to extend actual Court deadlines, such as briefing deadlines, require Court approval.  Judge Robinson also noted that there is no such thing as a “motion to substitute counsel.”  New counsel should file a notice of appearance, and then the withdrawing counsel must file a motion to withdraw (following all the requirements for such a motion).

Chief Judge Bledsoe reminded everyone of the change that eliminated the three day mailing rule, which we previously blogged on here.

The Judges offered some “best practices” tips for remote hearings:

  • They emphasized the importance of making eye contact; attorneys should not have the camera pointing at the side of their face.
  • If using PowerPoint, don’t just repeat your brief, and don’t make hyper-busy slides; distill your arguments to their essence, or put up key documents with key language highlighted.
  • After you put up a PowerPoint slide, take it back down as soon as possible to get your face back up on the screen.
  • Don’t be rigid and scripted and tied to doing your PowerPoint in order; be prepared to move around your slide deck to answer specific questions from the judge.
  • Submit and exchange any demonstratives ahead of the time of the hearing.

Not surprisingly, all of the Judges commended and expressed appreciation for Senior Business Court Judge Gale, who is nearing his planned retirement.  Judge Gale’s NCBC caseload has been reduced significantly as he transitions towards leaving the bench.

Finally, all of the Judges said they considered the opportunity to serve as Business Court judges as the highest honors of their careers, and they did not take that for granted.  They expressed appreciation for the opportunity to come speak (albeit virtually) to the bar.  As practitioners before the North Carolina Business Court, we should be equally appreciative that we have Judges so committed to their roles and willing to regularly share these insights with us.  I know I am.

–Patrick Kane

On January 5, 2021, the North Carolina Business Court published on its website guidance for attorneys seeking admission to the Court pro hac vice.  You can find a link to the resource here along with additional information and procedures for appearing before the Business Court.  The resource is also available from the website’s landing page on the right side, where there is a link to “Pro Hac Vice Motions Practice.”

The pro hac vice process is tedious and particular, and this guidance aims to ensure more consistent compliance.  In addition to reminding counsel to adhere to the requirements of N.C. Gen. Stat. § 84-4.1, North Carolina’s pro hac vice statute, the Business Court’s guidance provides a practical “how to” for those seeking admission pro hac vice under the Business Court Rules and the Business Court’s e-filing system.  Here are some helpful takeaways:

  • The attorney seeking admission pro hac vice must associate with an in-state attorney. The in-state attorney must create an account with the Business Court and first electronically file a notice of appearance in the action.
  • Then, the in-state attorney must electronically file a motion for pro hac vice admission of the out-of-state attorney.
  • The motion should fully comply with BCR 7 (the Business Court Rule that governs motions practice). However, the motion need not be accompanied by a brief (unless the Court directs otherwise).
  • Because the motion must comply with BCR 7, it must state that the in-state attorney has consulted with all other counsel and unrepresented parties to the action and must set forth the position of each party concerning the motion, whether any party intends to file a response to the motion, and whether any party wishes to be heard concerning the motion. See BCR 7.3.  This is a requirement above and beyond section 84-4.1.  Failure to comply with BCR 7.3 could result in the motion being summarily denied.

The Business Court also clearly reiterates the information that must be included with, or attached to, the pro hac vice motion pursuant to section 84-4.1:

  • The name, mailing address, state(s) of licensure, and bar membership number(s) of the out-of-state attorney seeking admission to appear pro hac vice in the action.
  • The out-of-state attorney’s history of pro hac vice admission in the State of North Carolina.
  • A client statement with certain declarations.
  • A statement signed by the out-of-state attorney seeking admission with certain representations.
  • A statement from the in-state attorney with certain representations, including a statement that they have forwarded or will forward the required $225.00 check to the Clerk of Superior Court in the county of venue.

Please refer to the Pro Hac Vice Motions Practice document for further details.  Attorneys seeking admission pro hac vice in the Business Court should carefully review this document in addition to the Business Court Rules, which—as noted above—set forth detailed requirements for motions practice in the Business Court.  The most up-to-date version of the Business Court Rules is available on the Business Court’s website here.

Contract with “substantial connection” with NC leads to PJ over a California Defendant who never visited NC.    

In Toshiba Global Commerce Solutions, Inc. v. Smart & Final Stores LLC, 2020 NCBC 95, Judge Conrad held that a California-based company that reached into NC to contract with a NC business was subject to personal jurisdiction.  What makes this decision interesting for PJ purposes is that the California company never travelled to NC or met or dealt directly with anyone in NC.  Instead, it dealt with the NC company’s employees located outside NC.  Nevertheless, the California company was subject to PJ in NC because it twice initiated contact with the NC-based company, and it knew (or should have known) it was dealing with a NC-based company and that work would occur in NC.  As a result, the California company reasonably should have anticipated the possibility of being haled into a NC Court.

Key Takeaways:  Things like who made first contact and whether the contract has a “substantial connection” with NC are key considerations.   As a practical matter, if you reach into NC to contract with a NC entity – especially for work in NC – your contract probably has a “substantial connection” with NC, and you are probably subjecting yourself to PJ of NC Courts.

The parties.  The Plaintiff, Toshiba Global Commerce Solutions, provides point of sale solutions (think bar code scanners at check out) for retail operations, including maintenance and repair services.  Toshiba’s headquarters and certain key operations are in Durham, NC.  The defendant, Smart & Final, is a California company that operates a chain of warehouse-style grocery stories in the western United States – none in NC.

First (and Second) Contact.  In 2017, Smart & Final was looking for a new maintenance company for its point of sale equipment.  One of the vendors it contacted was Toshiba.  The parties signed a non-disclosure agreement – notable, as Judge Conrad put it, because it lists Toshiba’s NC address at the top.  Over the next few months, Toshiba sent Smart & Final pitch materials and a formal proposal.  Those materials also indicated that Toshiba’s HQ was in North Carolina and that aspects of Toshiba’s work would be performed in NC.  Ultimately, Smart & Final hired another company; but that didn’t work out, and Smart & Final soon reached out to Toshiba a second time.

Negotiations lead to a deal.  Negotiations ensued between Smart & Final representatives in California and Toshiba representatives located in California and Texas.  Eventually, a deal was struck.  Of the array of maintenance options that Toshiba offered, Smart & Final chose a plan that involved Smart & Final’s pre-purchase (via Toshiba) of an assortment of repair and replacement parts that Toshiba would warehouse in NC and then dispense to Toshiba field technicians as needed.  As new parts were sent out, old parts were sent back to Toshiba’s facility in NC for repair.  Importantly, other service plans – that Smart & Final did not select – did not involve Toshiba’s pre-purchase, warehousing, and repair of part stock.  Over the course of performance, more than 4,000 parts were shipped from Toshiba’s NC warehouse and more than 2,000 old parts were sent back to Toshiba in NC for repair.

The Deal Goes South.  Less than a year into the initial three-year term, problems arose.  Toshiba claims the repair frequency was higher than predicted, leading to overage fees, which Smart & Final refused to pay.  Ultimately, Smart & Final terminated the contract early. Toshiba then sued in NC, and Smart & Final challenged PJ.

PJ Analysis:

No need to recite long arm statute.  First, Smart & Final argued that Toshiba failed to expressly plead PJ under NC’s long-arm statute, which is not mentioned in Toshiba’s complaint.  Judge Conrad quickly dispatched this argument, explaining that the failure to include a formulaic recitation of the statute is not required.  As long as the underlying facts were in the complaint, the long-arm statute is satisfied.  Here, the complaint included allegations of solicitation of and contract for services to be performed in NC, which satisfied the long-arm statute.

PJ is foreseeable if the contract has “substantial connection” to NC.  “Foreseeability,” Judge Conrad explained, is the “crucial factor.”  The foreseeability test is met when a suit is based on a contract that has a “substantial connection” with the State.   Citing to the NC Supreme Court’s 2020 PJ decision in Beem USA LLLP v. Grax Consulting, which we discuss here, Judge Conrad explained that “substantial connection” is based on several factors including, prior negotiations, future consequences, contract terms, and the parties’ course of dealing.

Assessing dueling affidavits – and reconciling any factual inconsistencies therein – Judge Conrad sided with Toshiba.  To start, Judge Conrad noted that Smart & Final twice contacted Toshiba to solicit services, noting that this was a “critical factor.”  Reaching into NC and soliciting business from a forum resident “tends to show purposeful availment.”

Smart & Final countered that none of the employees involved in the solicitation and contract negotiations was located in NC.  Analogizing the U.S. Supreme Court’s decision we all read in law school –  Burger King v. Rudzewicz, 471 US 462, 475 n.18 (1985) (where the Michigan defendant contacted a Florida company via it’s Michigan district office) – Judge Conrad concluded that it made “little difference” that the Toshiba employees that Smart & Final contacted were located outside NC.  Smart & Final was “well aware” that it was soliciting business from a NC-based entity.  The non-disclosure agreement that preceded negotiations noted Toshiba’s NC headquarters, there are repeated references to NC in the pitch materials and proposal, and the contract itself required formal contract notices be sent to Toshiba’s Durham, NC headquarters.  Finally, as to the parties’ course of dealing (i.e., performance): Judge Conrad explained that Smart & Final selected a maintenance plan that required Toshiba to coordinate all service calls and establish and maintain a part stock, which was work that would take place at Toshiba’s NC headquarters.  As a result, Judge Conrad concluded that the contract had a “substantial connection” with NC and that Smart & Final’s connections with North Carolina related to the contract were sufficient “minimum contacts” to establish personal jurisdiction.

Conclusion: Reaching into NC to contract with a NC-based company for work that will occur in NC will subject a foreign defendant to PJ in NC – even if the defendant never actually comes to the State; so, KYC (know your contractor).