When Philip Harvey died in December 2021 he owned more than 400 shares of common capital stock in PHE, Inc., a Hillsborough, North Carolina-based business that sells sexual wellness products and sex toys through a website and physical locations under the Adam & Eve banner. Despite ostensibly careful planning about the possible disposition of Harvey’s shares in a shareholder agreement and in his will, a dispute arose about whether PHE can force a redemption event or is simply obligated to buy back the shares if tendered by Harvey’s Estate.
In PHE, Inc. v. Dolinsky, 2022 NCBC 62, the Business Court waded into a dispute between the company and the executor of Harvey’s estate regarding the interaction, if any, among the agreement’s redemption provision, Harvey’s will, and an appraised value of the shares. Harvey was an initial shareholder in the company, which began as a mail-order contraceptive business “born out of” his master’s thesis project on family planning. Harvey repeatedly crusaded for First Amendment principles and against government attempts to shutter the business, including a lightning-fast 1987 verdict favoring PHE in conservative Alamance County.
That business has now grown, as The Washington Post estimated in Harvey’s obituary, to exceed $200 million in annual revenue. Indeed, Harvey’s Estate asserts in its counterclaim that the value of his shares in the company is more than $60 million.
In considering a motion to dismiss the company’s claim for breach of fiduciary duty, Judge Davis noted that the question of whether the company was within the class of persons who could assert such a claim against Harvey’s estate “is both an interesting one and an issue of first impression” in the state. Id. ¶ 27. It was also one the Court determined it didn’t need to reach because of the well-settled contours of the “economic loss” rule.
In October 2000, Harvey and PHE’s other shareholders approved an amended shareholder agreement that purports to restrict the disposition of shares upon a shareholder’s death and requires that “the Company shall have the obligation to purchase all [such] Shares” under specified terms and conditions. Id. ¶¶ 5-7. The Business Court didn’t decide when, or if, the purchase “obligation” had been triggered, but it found that the parameters set forth in the agreement were a particularly good fit for application of the economic loss rule, which “generally bars recovery in tort for damages arising out of a breach of contract[.]” Id. ¶ 28 (citing Rountree v. Chowan Cty., 252 N.C.App. 155, 159, 796 S.E.2d 827, 830 (2017)).
While Judge Davis noted the Business Court follows the doctrine so that “the open-ended nature of tort damages [does] not distort bargained-for contractual terms,” the Court also affirmed that tort claims arising from duties “separate and distinct from [ ] contractual obligations” can be viable. Id. ¶¶ 28-29. It just didn’t find any here.
The Court found that PHE did not dispute the validity or enforceability of the shareholder agreement, nor contest that Harvey’s estate “was required to comply with its terms.” Id. ¶ 31. See e.g. Burch v. Bush, 181 N.C. 125, 127, 106 S.E. 489, 490 (1921) (“contracts bind the executor or administrator, though not named therein”). It further noted the shareholder agreement provides that its measures: “shall be binding not only upon the parties hereto, but also upon their heirs, personal representatives, successors or assigns[.]” Id. ¶ 32.
Against this backdrop, the Business Court concluded the “economic loss” rule was applicable because (Id. ¶ 34):
“[I]t is hard to imagine a clearer example than the present action of a case in which the parties’ actual dispute hinges on the terms of a contract. The essence of PHE’s grievance in this case is [the executor’s] alleged failure to comply with the Estate’s obligations under the Agreement.”
- Consistent with its judgment that the shareholder agreement controlled, the Court also dismissed PHE’s claim for declaratory judgment that Harvey’s will required the Estate to follow the share redemption provisions of the shareholder agreement. That claim raised no “actual controversy” that merited determination.
- Harvey’s long-term interest in public health and family planning led he and co-founder Tim Black to form and promote charities that donated millions to those causes. One report estimated this charitable work subsidized more than a billion low-cost contraceptives in 90 countries, along with promotion of sex education and HIV prevention programs.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.