Wilmington North Carolina Business Law and Litigation Attorney Blog

Port City Java Sues Founder

Wilmington-based coffee-house chain Port City Java has filed suit against its founder and former COO Don Reynolds.  The suit, filed in New Hanover County Superior Court, alleges that Reynolds, his wife, and an LLC held by Reynolds, diverted funds from the company for personal use, including the purchase of real estate in Highland, NC. 

According to the Star-News, the suit was filed on December 23, and in keeping with the Rules of Civil Procedure, does not specify the dollar amount sought, but instead recites the claim for damages as "in excess of $10,000."

NC Gas Stations Settle Price Gouging Cases

The Star-News is reporting that several North Carolina gas station owners have agreed to settle price gouging cases.  The cases were brought by state Attorney General Roy Cooper after Governor Mike Easley invoked a state law prohibiting the charging of prices that are "unreasonably excessive."

The statute - N.C. Gen. Stat. § 75-38 - prohibits such prices on goods that are "consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property."

In order for the law to apply, however, the Governor must first make a finding that there has been an "abnormal market disruption."  This is defined in subsection (d) of the statute to include any declaration of a state of emergency or disaster is issued by the President, or the Department of Homeland Security advisory system issues a Code Red alert.  Triggering events can include war, a terrorist attack, a natural disaster, power outage, or other "extraordinary adverse circumstances."

In the case of the recent September price spikes, the trigger was hurricane Gustav - and the fear that gripped the oil markets - as it moved into the Gulf.

Unfair Commercial Practices in the U.K. - Stealth Marketing Illegal

At seomoz.org, attorney Sarah Bird has posted a summary of the portions of a new U.K. law against stealth marketing - the practice of manufacturing an imaginary groundswell of support for a product in an effort to raise brand awareness and facilitate "buy-in" from the target market.  The U.K. law implements portions of an E.U. directive 2005/29/EC, prohibiting Unfair Commercial Practices.

Examples of the newly prohibited practices include:  paid reviews or "advertorials" in magazines that fail to disclose the commercial relationship between the magazine and the advertiser; paid blog comment seeding; fake blogs (like the kinds used to promote new movies); and fake comments praising books on amazon.com.

While here in the U.S. we have laws against false advertising, for the most part these laws are only designed to protect competitors, not consumers.  Consumers have recourse to warranty law in regard to false claims, but so far have no recourse against viral marketers who somehow quietly influence them to purchase a particular product.  Two things about this stand out:  (1) It is not immediately clear what the harm of this is, odd though it may seem to us older folks, and (2) how little consideration is given to the protection of speech in Europe.  While here in the U.S., commercial speech is not entitled to the same level of protection as non-commercial speech, we are nevertheless far removed from having the power to enact this sort of sweeping legislation.

For the record, neither seomoz nor anyone affiliated with the company paid me to link to their article.

Final note:  if you are a North Carolina company doing business in Europe, or targeting customers there, European courts may be able to exercise jurisdiction and subject to you being sued in their courts.  Accordingly, a full review of this new law should be undertaken to assess its applicability to your overseas marketing.

Piercing the "Corporate" Veil of LLCs in North Carolina - Part 4

In the previous post, I promised a discussion of motions for sanctions pursuant to Rule 11 of the North Carolina Rules of Civil Procedure, in cases where LLC members are named as individual defendants in contract, fraud and Chapter 75 cases.

In North Carolina, the rule is straightforward:  an individual LLC member cannot be sued, except "by reason of his own acts or conduct."  See N.C.G.S. s 57C-3-30(a).  This section does not, however, establish an alter ego or veil piercing creteria.  It is intended to allow plaintiffs to recover for torts committed by LLC members, not, as some might have it, to establish member liability in actions against the LLC.

Clarifying this purpose, subsection (b) provides:  "A member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object of the proceeding is to enforce a member's right against or liability to the limited liability company."

This subsection should clarify any doubt a litigant might have about what subsection (a) allows. 

In Page v. Roscoe LLC, 128 N.C. App. 678, 497 S.E.2d 422 (1998) the plaintiff learned this lesson the hard way.  Plaintiffs sought to enjoin the defendant LLC from constructing a gas storage facility they deemed a nuisance.  LLC member Dale Bone was also named as a defendant.  No actions by Bone were alleged that were not also alleged to have been undertaken by the LLC.   Accordingly, the court held that naming Bone was a violation of Rule 11, on the theory that the complaint, in naming him, was not well grounded in law.

In so holding, the Court of Appeals agreed with the trial court, that "no acts by Bone, individually, were properly alleged. Therefore, under the above statute [N.C.G.S. s57C-3-30(b)], it was improper to name an individual member of a limited liability company as a party defendant without any evidence to support it.  As such, the naming of Bone as an individual defendant was not well-grounded in law and therefore a violation of Rule 11." 

The decision provides little guidance to a plaintiff hoping to pierce the corporate veil of an LLC.  There is no explanation about what would need to be alleged to state a complaint If anything, it provides broad grounds to support Rule 11 motions whenever an individual LLC member is named in the same complaint as the LLC.

Quizno's Franchisees Sue for Fraud and Unfair Business Practices

A group of Quizno's franchisees has filed suit against Quizno's alleging:  fraud, unfair competition, breach of contract, and racketeering, among other things.  The primary allegations are that Quizno's agreements with franchisees unlawfully prohibits them from seeking the best price on the goods they buy -- particularly food -- and instead requires them to buy only from certain suppliers.  These suppliers, the plaintiffs claim, over-charge because they know the franchisees have no other options. 

While the allegations are explosive, such suits are not new.  A few years ago, Quizno's franchisees sued the company, alleging similar kinds of unfair business practices, in its hometown of Denver.  Those cases were dismissed.  It will be interesting to see both (a) what these franchisees have learned from the mistakes of their predecessors, and (b) how well the company fares outside its own hometown. 

Borat Lawsuits: Valid?

The Borat movie has only been out a few days, and lawsuits are flying already.  Two frat boys from South Carolina have sued "Borat", comedian Sacha Baron Cohen, and the movie's makers and producers.  The suit alleges that they were tricked into believing that the film would not be shown in the United States, and that the young men only signed the Standard Consent Agreement after they had been drinking alcohol. 

The Complaint alleges several causes of action: fraud, false light, appropriation of likeness, and negligent infliction of emotional distress.  This despite the fact that Paragraph 4 of the Consent Agreement specifically waives their rights to file any such actions.

They key then is the plaintiffs' demand for recission of the Consent Agreement.  If they can succeed in having that waiver rescinded, then the claims the waiver would otherwise bar can move forward.

The plaintiffs allege that they were both lied to about the movie, and that they were intoxicated at the time they signed the waiver.  Either allegation, if sufficiently proven, could serve as a basis for rescission of the waiver, which would allow the other claims to go forward. 

Click Fraud: Are You Wasting Online Advertising Dollars?

BusinessWeek Online has this article on click fraud -- a practice whereby online advertisers generate phony clicks and charge clients for them.  The salient portions of this scam are summarized as follows:   

"The spreading scourge poses the single biggest threat to the Internet's advertising gold mine and is the most nettlesome question facing Google and Yahoo, whose digital empires depend on all that gold.  The growing ranks of businesspeople worried about click fraud typically have no complaint about versions of their ads that appear on actual Google or Yahoo Web pages, often next to search results. The trouble arises when the Internet giants boost their profits by recycling ads to millions of other sites, ranging from the familiar, such as cnn.com, to dummy Web addresses like insurance1472.com, which display lists of ads and little if anything else. When somebody clicks on these recycled ads, marketers such as MostChoice get billed, sometimes even if the clicks appear to come from Mongolia. Google or Yahoo then share the revenue with a daisy chain of Web site hosts and operators. A penny or so even trickles down to the lowly clickers. That means Google and Yahoo at times passively profit from click fraud and, in theory, have an incentive to tolerate it. So do smaller search engines and marketing networks that similarly recycle ads."

Under North Carolina law, defrauded advertisers could claim for Breach of Contract, Unfair and Deceptive Business Practices (N.C.G.S. ss 75-1.1 et seq.), Fraud, and possibly Civil Conspiracy.  Depending on the number of affiliated operators, there could even be a devastating Civil RICO claim, described by one appeals court as "the litigation equivalant of a thermonuclear device".  See Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1999).  Violators could be subject to triple damages or punitive damages under either N.C.G.S. Ch. 75 or under the Civil RICO law.

In recent years, companies such as Google and Yahoo have paid out multimillion dollar settlements to satisfy claims that their "pay per click" advertising campaigns were being conducted fraudulently.  Many more claims are pending. 

Business to Business Contract Litigation on the Rise

According to this article lawsuits between businesses are multiplying rapidly.  There has been particular growth in lawsuits arising out of business contracts.

The article does not go into detail about why this is.  In my experience, it involves a number of things.  (1) Many businesses do not have lawyers draft, or review, their contracts before putting them into use.  Some of these contracts go out to thousands of clients.  A mistake, or a failure to add a clause reflecting an important legal protection, can be multiplied hundreds, or thousands of times.  (2) Often, a business will settle on a form contract, then use it over and over, for years on end without ever changing it.  Yet the law changes every year; even every month.  In North Carolina alone, there are hundreds of decisions every year that act as precedent in cases involving contracts, as well as the potentially devastating Unfair and Deceptive Practices Act, which permits triple damages, often in very routine business to business breach of contract litigation.

The moral of the story?  Make sure your contracts and business practices are as up to date as possible; if your contracts with customers, vendors, suppliers, distributors and everyone else you do business with aren't up to date with the latest developments in business and contract law, you could be staring at one of these "bet the company cases.

Hiring Illegal Immigrants: Unfair to Competitors?

A recent suit filed in California alleges that businesses that hire illegal immigrants gain an unfair advantage over competitors.  Businesses who play by the rules, the plaintiffs argue, pay considerably more in labor costs and taxes, which puts them at a disadvantage.  While there is an intuitive logic behind this argument, it remains to be seen whether plaintiffs can prove they were directly harmed. 

It is going to be difficult to explain that following the law is a competitive disadvantage, (though executives in heavily regulated industries will grasp this concept quite readily).  To say the least, the claim that "we followed the law" constitutes a novel statement of harm.  Businesses are supposed to follow the law, so there are inherent problems in arguing that "following the law" is a cause of damages. 

Nevertheless, illegal acts of various kinds can serve as the basis for unfair competition claims.  If this or any similar case is successful, a host of other companies whose competitors hire undocumented workers - farms, mills, factories - are prepared to file similar suits.  Whether or not any of these particular suits are successful, expect a wave of similar cases around the country very soon.