Category Archives: NC Business Court

JUST BECAUSE THE HORSE HAS STRIPES ON IT DOESN’T MAKE IT A ZEBRA – Business Court Finds “Securities Transaction” Beyond the Reach of Chapter 75

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Posted by Eric Welsh on January 28, 2010 – 9:05 am
Filed under NC Business Court, South Carolina Law, Unfair Competition

In a decision rendered in October 2009, the North Carolina Business Court dismissed a claim brought under North Carolina’s Unfair and Deceptive Trade Practices Act, finding that the conduct alleged was a “securities transaction” and beyond the scope of Chapter 75. Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, National Association, 08 CVS 27739 (Oct. 6, 2009).

In that case, Charlotte-Mecklenburg Hospital brought a series of claims against Wachovia Bank related to a Securities Lending Agency Agreement. It was alleged that under that Agreement, Wachovia was to manage cash collateral investments on the Plaintiff’s behalf pursuant to specific investment guidelines governing the investment activity. It was further alleged that Wachovia made an imprudent investment as part of this securities lending program. The Plaintiff alleged that the investment was too risky and that Wachovia failed to liquidate the investment timely, resulting in a loss of $14 million.

In moving to dismiss the complaint, Wachovia challenged the Unfair and Deceptive Trade Practices claim on the basis that securities transactions are exempted. Citing Skinner v. E.F. Hutton & Co., Inc., 333 S.E.2d 236, 241 (1985), Wachovia argued the Plaintiff’s allegation related to a security transaction and therefore was outside the reach of Chapter 75. In response, the Plaintiff acknowledged that the statute does not govern securities transactions but tried to escape dismissal, arguing that the subject of the claim involved “investment advice” and an “investor/investment advisor relationship,” not “securities transactions.” In advancing this argument, however, the Plaintiff failed to rely on any controlling authority that was apposite to the issues at hand. The Business Court rejected the Plaintiff’s attempt to reclassify its claim.

While correctly noting that the commerce element of Chapter 75-1.1 encompasses a broad range of business activity, the Business Court stated that “it does not cover ‘all wrongs’ in a business setting.” Id. citing Sterner v. Penn, 159 N.C. App. 626, 632-33, 583 S.E.2d 670, 675 (2003). The Business Court went on to cite North Carolina case law that has excluded securities transactions, beyond conventional securities, from the reach of the statute. See e.g. Oberlin Capital, LP v. Slavin, 147 N.C. App. 52, 62, 554 S.E.2d 840, 848 (2001) (Chapter 75 claim dismissed in case involving a loan agreement). Noting that courts have previously held that “transactions entered into for purposes of raising capital also qualify as a ’securities transaction’,” Id., the Business Court found the “securities lending program” at issue in the case to be similar to “raising capital” and therefore beyond the statute’s definition of “in or affecting commerce.”

Ultimately, the Business Court was not persuaded by the Plaintiff’s creative labeling. Reading Plaintiff’s argument, one is reminded of Shakespeare: “A rose by any other name would smell as sweet.” The Plaintiff’s argument was certainly not made any easier by the fact that, while at the same time it argued its claim did not involve securities transactions, it brought a separate claim against Wachovia for a violation of North Carolina Securities Act and relied on the same basic facts for both of these claims.

SPORTS MEMORABILIA CARDS PROCESS NOT LIKELY A TRADE SECRET? SAY IT AIN’T SO JOE.

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Posted by Eric Welsh on January 11, 2010 – 9:00 am
Filed under NC Business Court, North Carolina law, Trade Secrets

In a decision rendered by the North Carolina Business Court in November 2009, Judge Diaz denied a motion for a preliminary injunction filed by plaintiff Napco, Inc. (”Napco”) in connection with a sports memorabilia manufacturing process that it alleged was a trade secret. NAPCO, Inc. v. PBM Graphics, Inc., 09 CCVS 157. While the Court’s order is short on detail, briefs submitted by the parties provide some helpful insight into the Court’s decision. The briefs also help highlight one conclusion to be drawn from the order: irreparable harm may not necessarily exist in a trade secret case.

In that case, it was alleged that Napco developed for PBM Graphics (”PBM”) a manufacturing process for sports memorabilia cards which PBM intended to use in supplying cards to a third-party customer, The Upper Deck Company. The “memorabilia cards” were allegedly different than other sports cards as they would have imbedded in them a swatch of a jersey or a sliver of a broken bat. Napco alleged that it created this process for PBM as a subcontractor, with the assurance that large orders would be placed for these cards as long as a satisfactory product could be produced. Napco further alleged that PBM, having gained access to the process, then misappropriated it for supplying cards to the Upper Deck Company. Napco asserted claims of trade secret misappropriation and unfair competition under North Carolina’s statutes and moved for a preliminary injunction. Interestingly, Napco did not allege that it had formed any contract with PBM or that PBM breached any obligation of confidentiality owed to Napco.

PBM had a different take on the situation, challenging virtually every aspect of the plaintiff’s claims in opposing the motion. Two arguments, however, bear noting. First, PBM argued that Napco’s claim was deficient because Napco “shared its alleged trade secrets without negotiating any obligation on the part of PBM to maintain the secrecy of these purported secrets.” Rather, Napco, according to the Defendant, provided PBM “all its purported trade secrets in the hopes of getting future work from PBM.” Second, PBM argued that Napco understood fully that it was hired to develop the process for both Napco and PBM and if successful, Napco would be awarded substantial work by PBM. “NAPCO’s reward for success was solely monetary” and therefore, plaintiff could not show irreparable harm for an injunction to be granted.

In denying the motion, the Business Court found many failings with the plaintiff’s argument. First, the Court noted was that there was substantial evidence presented that the claimed trade secret, the Napco process for manufacturing the sports memorabilia, did not work. Of course, one requirement of a trade secret in North Carolina is that the alleged secret have actual or potential commercial value. The Court found the evidence wanting in this respect, which obviously posed a hurdle for a preliminary injunction. The Court also found that evidence presented demonstrated that the alleged secret incorporated technology that was widely known and used in the printing industry. Again, this undermined the claim that the alleged secret had actual or potential commercial value from not being generally known or readily ascertainable through independent development.

Of significance here, the Court found that the Plaintiff had failed to show it had taken reasonable efforts to protect its alleged secrets, a fundamental element of any trade secret claim. The Court noted that the parties never negotiated a confidentiality agreement to protect the information or prevent its use by PBM. While Napco relied heavily on logs signed by PBM employees when visiting Napco’s facility as evidence of some agreement not to disclose confidential information, the Court found the language of the log too vague: visitors “may” be exposed to confidential or proprietary information of Napco.

Finally, while finding the Plaintiff had failed to show a likelihood of success on the merits, the Court also found a separate ground to deny the motion for an injunction: the lack of irreparable harm. Noting that the Plaintiff made no claim that PBM took the alleged secret for any other purpose, the Court found that any damage could be addressed through monetary damages, as the Plaintiff had alleged that it had been promised to be awarded a contract to produce the cards for the Upper Deck Company. The Court reasoned “it should be relatively simple for Plaintiff to calculate its damages, which will be measured either by Plaintiff’s lost profits or the extent of Defendant’s unjust enrichment resulting from the alleged violation of the NCTSPA. Accordingly, because Plaintiff has an adequate remedy at law, the Court declines to grant preliminary injunctive relief.” Had the Plaintiff alleged some greater harm — such as the Defendant disclosing the trade secret to others, destroying its value, or using it with other customers — perhaps the Court would have come to a different conclusion on this point.

The Napco decision is interesting in that cases involving motions for preliminary injunctions to protect trade secrets typically do not turn on the irreparable harm component. Here, the Court found that fatal to the motion. But the Napco case also serves as a reminder of the need to take appropriate precautionary steps, through contract or otherwise, to protect the information claimed to be a trade secret. Without such steps, significant hurdles exist to convincing any court that injunctive relief is warranted.

Customer Files Found Not to be a Trade Secret

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Posted by Eric Welsh on December 9, 2009 – 2:33 pm
Filed under NC Business Court, North Carolina law, Trade Secrets

In August, the North Carolina Business Court, in Edgewater Services, Inc. v. EPIC Logistics, Inc., 2009 NCBC 20 (August 11, 2009), granted summary judgment in part for Defendants on the plaintiffs’ trade secret claim related to its rates and customer files. In that case, plainitff Edgewater Services, Inc. (”ESI”) alleged that the defendants misappropriated its carrier files, rates and customer files and that this information constituted trade secrets under North Carolina law. In discovery, the plaintiff made significant admissions, in effect conceding that only the rates were trade secrets and then admitting that those rates change as variables such as fuel costs change. The plaintiff also conceded that the alleged trade secret information was kept in an unlocked file room “accessible to anyone.” These admissions were probably too great to overcome. The evidence also showed that the customer files were kept by salespersons in their respective offices.

In granting the defendants’ motion for summary judgment on this part of the plaintiffs’ case, the court found that the plaintiffs’ carrier files, rates and customer files were not trade secrets. In support of this conclusion, the court noted that the information could be “learned directly from carriers and customers of ESI.” The court also noted that ESI did not take sufficient steps to safeguard the information.

While the opinion does elsewhere mention the fact that the defendant had entered into an employment agreement and non-compete (and indeed the court denied summary judgment to the defendants with respect to a non-disclosure covenant in that agreement), the court apparently gave this little or no weight in finding that inadequate steps were taken to protect the alleged confidential information. Interestingly, the court, in finding that the customer information was not a trade secret because it could be learned from the customers themselves, did not refer to the portion of the statutory definition that states that a trade secret includes a compilation of information. Of course, an argument could be made that customer files are a compilation of information that are worthy of protection. It is worth noting that the Business Court previously in the Sunbelt case, found that a compilation of information, including customer information, should be afforded trade secret protection. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2003 NCBC 4 (May 2, 2003). Although the court did not mention the Sunbelt case or the compilation point specifically, the court did note that the alleged trade secrets were “compiled in the course of doing business” and there was no evidence that the plaintiffs expended “any significant amount of effort or money in developing the information, outside of the cost of doing business.” While this statement appears to be directed at the value of the alleged trade secret, case law does exist to support the proposition that trade secret status can be afforded to information that is developed in the ordinary course of a company’s business. See e.g. Sunbelt, supra, and Byrd’s Lawn & Landscaping, Inc. v. Smith, 142 N.C. App. 371 (2001).

Post script: This author was on the Sunbelt trial team.

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