Contacts, not contracts, are the key.

Shortly after the Supreme Court’s decision in Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. –, 838 S.E.2d 158 (2020), Judge Gale decided a series of personal jurisdiction motions in Diamond Candles, LLC v. Winter, 2020 NCBC 17 (N.C. Super. Ct. Mar. 12, 2020). The results were mixed.

Key takeaways:

• Providing legal services to a NC client, alone, may not establish personal jurisdiction over an out-of-state lawyer.
• Contacts with the forum itself – e.g. submissions to Secretary of State, regulators, etc. – are key.

Background

Diamond Candles (a NC LLC) was a successful candle-selling company looking to be bought; but when the offers fell through, its owners got suspicious. Diamond Candles came to learn that its e-commerce vendor was grossly overcharging it (depressing company value) as part of an alleged scheme by the defendants to acquire Diamond Candles at less than fair market and then sell it for a profit. Diamond Candles leveled a slew of claims against its former CEO and several out-of-state defendants, including Diamond Candles’ (former) law firm and lawyer and the e-commerce vendor and its president. The out-of-state defendants all moved to dismiss for lack of personal jurisdiction.

No PJ over foreign lawyers because all legal work was done outside the State, there were no contacts with the forum itself, and the claims did not arise from the legal work.

Judge Gale first assessed whether the Houston-based law firm and its California partner were subject to personal jurisdiction. They represented Diamond Candles on general corporate and financing matters in two engagements, both of which ended years before the lawsuit. There was no allegation that the firm or its lawyers solicited Diamond Candles for the work, they had no physical presence in NC, and they derived negligible work and revenues from North Carolina. And during these limited engagements, they never came to North Carolina. Their only contacts were phone calls and emails.

Judge Gale first discussed another personal jurisdiction opinion involving out-of-state lawyers serving a North Carolina client, Summit Lodging LLC v. Jones, Spitz, Moorhead, Baird & Albergotti, PA, 176 N.C. App. 697, 627 S.E.2d 259 (2006). In Summit Lodging, South Carolina lawyers helped form a NC LLC to purchase a NC hotel. To form the LLC, the SC lawyers signed and submitted necessary papers to the North Carolina Secretary of State, a key contact with the forum itself. They also communicated by mail and telephone with both their NC clients and the NC seller of the hotel. The Court of Appeals concluded these were sufficient contacts with North Carolina to establish personal jurisdiction for a malpractice claim arising from this legal work.

The out-of-state lawyers’ contacts in Diamond Candles were more limited. And there is a difference, Judge Gale explained, between activities aimed at a plaintiff who happens to be in North Carolina and those aimed at the forum itself. Contacts with the forum itself clearly constitute “purposeful and deliberate” contact with the forum making it fair to exercise personal jurisdiction; but contacts with a plaintiff that happens to reside here may not.

Unlike Summit Lodging, none of the lawyers’ work for Diamond Candles was directed to the forum. There were no direct filings to the North Carolina Secretary of State, for example. Instead, the client, Diamond Candles, just happened to be here. Judge Gale further explained that legal engagements were akin to ‘contracts’, and he noted several cases where courts in North Carolina were reluctant to exercise personal jurisdiction where, like here, the contracts contemplated that work would be performed entirely outside the state. Judge Gale also noted several decisions from outside North Carolina where courts rejected an in-state client’s effort to subject an out-of-state lawyer to suit in the client’s home forum on due process grounds.

Although Judge Gale did not press the point, another key distinction seemed to be the relationship of the lawyers’ contacts to the claims. In Summit Lodging, the in-state client sued its out-of-state lawyer for legal malpractice. So the claims arose directly from the contacts. Diamond Candles, however, didn’t sue for malpractice. Instead, it sued the defendants for their breach of fiduciary duties by participating in a scheme to depress the company’s sale value. Thus, the connection between the contacts and the claims was more attenuated.

Seemingly a close call, Judge Gale concluded Summit Lodging was distinguishable and subjecting the out-of-state lawyers to personal jurisdiction would not “comport with ‘fair play and substantial justice.’” (quoting Burger King and International Shoe).

Yes PJ over the other defendants because the claims “arose from” their contacts.

Personal jurisdiction over the e-commerce company and its president was an easier decision. The e-commerce vendor (and its president) had traveled to North Carolina in connection with both the e-commerce contract and in furtherance of the alleged scheme. They also continued to receive substantial and allegedly excessive revenues from Diamond Candles’ North Carolina operations. And, most importantly, the causes of action clearly arose out of these contacts with and in North Carolina.

The company’s president argued, however, that his actions were as “an officer” and should not be imputed to him, individually. He cited an unpublished case from the Middle District of North Carolina as support. See Mkt. Am. V. Optihealth Prods., No. 1:7-00855, 2008 U.S. Dist. LEXIS 95337, at *3 (M.D.N.C. Nov. 21, 2008). But Judge Gale disagreed with his read of this case, and rejected this argument. Judge Gale explained that actions taken while president will not shield the person from personal jurisdiction if, as is the case here, the acts are directly connected with the issues in the lawsuit. More broadly, the president failed to offer sworn testimony or other evidence to contradict Diamond Candles’ allegations and evidence regarding the president’s contacts, which Judge Gale thus accepted as true. Judge Gale concluded the Court had personal jurisdiction over both the e-commerce vendor and its president.

The mixed results here show that having a contract with a NC resident may not be enough, and that the type of contacts matter. Contacts with the forum itself, and contacts that give rise to the claims are most important.   Contacts, not contracts, are the key.