North Carolina’s Business Court Rulings: A Year In Review
As we raise a glass to say goodbye to 2019 and welcome 2020, we take a look back at some of the more significant opinions the Business Court published over the last twelve months (or so). These cases would be helpful for any company which does business in North Carolina to keep in mind.
Operating Agreements & Fiduciary Duties
The Business Court issued several opinions this year discussing special legal duties (a/k/a “fiduciary duties”) in the context of members of an LLC. The Court made clear in Finkel, et al. v. Palm Park, Inc., 2019 N.C.B.C 37, that the mere existence of an operating agreement does not create fiduciary duties among members, but reiterated that members are free to agree to such duties within the terms of the agreement. And unlike a corporation where a majority owner likely owes a fiduciary duty to a minority owner merely because of majority ownership, the Court expressed in Vanguard Pai Lung, LLC, et al. v. Moody, 2019 NCBC 38, that such is not the case with an LLC; instead, the existence of the duty turns on the level of control of management. As a result, a 50/50 owner is unlikely to owe any fiduciary duty to her co-owner. Potts, et al. v. KEL, LLC, et al, 2019 NCBC 29. And if the agreement provides certain management protections for the minority owner, then it is unlikely a fiduciary duty will be recognized between majority and minority owners. See Finkel, supra.
The Business Court also took on cases involving corporate governance. In Ehmann v. Medflow, Inc., 2019 NCBC 9, the Business Court explained that while a director’s salary is presumed fair for her work as a director, she must still prove any compensation received for other work performed for the business is fair to the company. The Business Court also held that a member of an LLC can agree to many things, but cannot contract away her statutory right to seek dissolution of the company. Slaughter v. Winner Enterprises of Carolina Beach, LLC, 2019 NCBC 1. Finally, while many operating agreements make clear that a member can be called on to make further capital contributions, the Business Court in Bennett, et al. v. Bennett, et al., 2019 NCBC 45, explained that only the company (and not another individual member) can make the legal claim against the member for his failure to make the requested capital contribution.
In this ever competitive world of getting and retaining talent, employment agreements at often at the heart of litigation. This year, the Business Court addressed several cases involving such agreements. In Kelley v. Charlotte Radiology, P.A., 2019 NCBC 14, the Business Court explained that a company’s decision to decline to renew an offer of employment does not give rise to an at-will employment relationship. In Construction Managers, LLC, et al. v. Amory, 2019 NCBC 31, the Business Court held that if an employment agreement fails to acknowledge that a relatively high-positioned employee (i.e., a project manager) has certain fiduciary duties, the law will not recognize a de facto duty if the owners can still access various company information. Finally, the Business Court determined that even if certain restrictive covenants in an employment agreement fail, an agreement’s post-employment, non-disclosure covenant might survive independently. NFH, Inc. v. Troutman, et al., 2019 NCBH 64.
Businesses often encounter problems related to the contracts they have with other companies. The Business Court issued three important contract-related decisions this year. In Denver Property Partners, LLC v. Brian Sisson, et al. 2019 NCBC 22, the Business Court held that a requested change to even a single material term of a proposed contract prevents the company from later unilaterally accepting the last version offered prior to the change. The Business Court also explained in Crescent University City Venture, LLC v. AP Atlantic, Inc. et al, 2019 N.C.B.C. 46, that a contract’s exclusion of consequential damages prevents a business from recovering post-breach losses incurred from its dealings with third parties. Finally, the Business Court made clear that a business cannot bring a tort claim for solely economic damages arising from what was otherwise anyone’s failure to fulfill its contractual obligations. Crescent University City Venture, LLC v. AP Atlantic, Inc. et al, 2019 N.C.B.C. 48.
Pre and Post-Transaction Issues
Issues often arise prior to and after the sale of a business. This year, the Business Court held that the failure of a business’ investment banker to obtain NDAs from prospective purchasers or investors might waive the business’ ability to claim a trade secret over the shared information. Aym Technologies, LLC v. Rodgers, et al., 2019 NCBC 63. The Business Court also held that if a buyer fails to explain in its lawsuit why it did not or could not conduct due diligence which would have revealed the inaccuracy of representations by the seller, the buyer cannot maintain a fraudulent inducement claim against the seller based on those misrepresentations. Value Health Solutions, Inc. v. Pharmaceutical Research Associates, Inc., 2019 NCBC 68. Additionally, the Business Court determined that restrictive covenants in a company’s employment agreements are likely unenforceable by the new owner following an asset purchase sale. Addison Whitney, LLC v. Brannon Cashion, et al, 2019 NCBC 16. Finally, the Business Court decided that a former owner’s post-sale, contractual obligation to collect and deposit his company’s outstanding accounts receivable into the buyer’s designated bank account did not make the former owner a fiduciary. Dunn Holdings I, Inc. v. Confluent Health, LLC, 2018 NCBH 126.
Claims Against the Competition
The Business Court also handled a number of cases involving competition between businesses. If an employee owes fiduciary duties to a business but starts working for a competitor, the Business Court held that the competitor might be vicariously liable for the employee’s breach of her fiduciary duties. Global Textile Alliance, Inc. v. TDI Worldwide, LLC, et al, 2018 NCBC 121. The Business Court also explained in Charah, LLC v. Sequoia Services, LLC, 2019 NCBC 17, that merely employing an individual in knowing violation of a non-compete does not amount to a tortious interference with contract. The Business Court also decided that in order to maintain a tortious interference claim against an adversary, a business must prove the adversary induced the customer to breach or to not perform. Southeast Anesthesiology Consultants, PLLC v. Rose, et al., 2019 NCBC 51. However, in KNC Techs., LLC v. Tutton, et al., 2019 NCBC 71, the Business Court prevented a company whose confidential information had been stolen from maintaining an unjust enrichment claim against the competitor which had received the confidential information, essentially relegating the owner to “out of luck” status.
The Business Court also addressed a number of cases involving agreements containing arbitration provisions. While recognizing that a non-signatory to a contract which contains an arbitration clause can be forced to arbitrate its contract-based claim if so requested by a party to the contract, the Business Court held that the reverse is not true; a non-signatory cannot force the signing-party to arbitrate the non-signatory’s claims. Charlotte Student Housing DST, et al. v. Choate Construction Co., et al, 2019 NCBC 20. Moreover, an agreement to arbitrate in North Carolina is no agreement to litigate in North Carolina courts for purposes any personal jurisdiction analysis. Curvatur, Inc. v. Cantel Computer Services, Limited, 2019 NCBC 47. Finally, the Business Court held that the arbitrator—and not the Court—would determine whether class wide arbitration is available if the arbitration provision at issue incorporates any of the Rules of the American Arbitration Association. Rickenbaugh v. Power Home Solar, LLC, 2019 NCBC 79.
Additional Legal Odds & Ends
The Business Court will apply the liberal discovery rules of N.C.R.C.P. 26 and not the federal-court created “Apex Doctrine” to determine whether high-level executives and officers will be required to testify. Duke Energy Carolinas, LLC v. AG Ins. SA, et al., 2019 NCBC 73.
To obtain common law indemnity, the business’ underlying injury cannot be a breach of contract. Crescent University City Venture, LLC v. AP Atlantic, Inc., et al., 2019 NCBC 46.
Merely FYI’ing your attorney on a communication does not necessarily create a privileged communication. Window World of Baton Rouge, LLC, et al. v. Window World, Inc., 2019 NCBC 53.