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.
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.
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!
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 Concepcionand 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 Colorsprecluded 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.
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.
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