Persistence can be a valuable quality, but when it leads to an unjustified refusal to give up a questionable case, the party suffering from persistency can get socked with attorneys' fees. That was the result in Judge Gale's Order on Tuesday in McKinnon v. CV Industries, Inc.
McKinnon was entitled to benefits under a Severance Agreement which looked at when he had stopped competing with CV Industries after leaving his employment (yes, it's unusual for a party to say he's entitled to benefits because he was competing with his former employer but that was the situation here).
McKinnon argued throughout discovery, and into the Court of Appeals and then into a Petition for Discretionary Review with the NC Supreme Court that his employment with a company called Basofil Fibers was in competition with CV Industries. CV Industries manufactures high-end furniture and fabric through two subsidiaries. Basofil manufactures and sells fiber, but not fabric.
The Business Court's opinion by Judge Tennille on summary judgment -- and the Court of Appeals opinion -- turned on the meaning of the word "competition. McKinnon urged a very broad definition saying that Basofil "competed" with CV Industries because they both sold product to the furniture industry. Both Judge Tennille and the COA rejected that argument. The COA said that "competition":
entail[s] more than mutual existence in a common industry or marketplace; rather, it requires an endeavor among business entities to seek out similar commercial transactions with a similar clientele.
It also observed that under McKinnon's theory of "competition," nearly every business selling any product or service to the furniture industry would be in competition with one another. It said that McKinnon's definition was "unpersuasive" and "excessively broad." Appellate Opinion at 17.
The basis for the award of fees was N.C. Gen. Stat. Section 6-21.5, which says that "[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney's fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."
The issue wasn't whether McKinnon had a valid belief of a"justiciable issue" that he could prove he was in competition with his former employer when he filed his complaint . As Judge Gale put it, "the more difficult question is whether he legitimately continued in that belief when pressed during the course of litigation to support his claim and failed to present a clear basis on which he could claim relief." Op. ¶58.
When was the turning point when that belief was no longer legitimate? Judge Gale said that it was after summary judgment was entered against McKinnon on his claims. Judge Gale ordered that CV Industries was entitled to $40,000 in fees for McKinnon's unjustified persistence after that point.
Judge Tennille's summary judgment Order left no doubt on how he viewed the claims. He said that "with the exception of Mckinnon's self-serving conclusory allegations" it was "entirely unrefuted" that McKinnon's employer was not in competition with the Defendant.
The fee award was probably not satisfactory to the Defendant, which had sought $322,000 in fees, presumably the cost of defending the case from the outset. If that's so, it probably explains why the Defendant also moved for fees per Rule 11. Rule 11 requires that a Complaint (or any paper filed with the Court) must be "well grounded in fact and . . . warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."
The problem with the Rule 11 argument was that the analysis of an entitlement to sanctions stops with the Complaint itself. It is limited to "a review of the challenged pleading and whether it was warranted by facts and law known to the submitting party at the time the pleading was signed." Op. ¶37.
The inquiry under section 6-21.5 is different and more flexible. There, the court properly looks "beyond a particular pleading to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue." Op. ¶43 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991).
Don't walk away from McKinnon thinking you are entitled to attorneys fees just for getting summary judgment against a claim. That's certainly not the law. Success on summary judgment is only some evidence "to support . . . a finding" for fees. Op. ¶42.
Lexis.com subscribers can access a Lexis enhanced version of the McKinnon v. Cv Indus., 2012 NCBC 36 (N.C. Super. Ct. 2012) decision with summary, headnotes, and Shepard's.
Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.
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