Procedural Pitfalls in the North Carolina Business Court Designation Process: the Stout Story
A business dispute involving several parties and claims, intellectual property, and alleged damages to the tune of $33 million sure sounds like the type of high-stakes, complex business case destined to be litigated in the North Carolina Business Court, especially when a Superior Court Judge suggests that the case may meet the requirements for Business Court designation.
As it turns out, though, the case did not make it to the Business Court, even after two attempts to get it there. The Business Court’s recent Order on Designation in Stout v. Alcon Entertainment, LLC explains why.
The parties in Stout asserted unfair and deceptive trade practices claims, but these claims did not affect the outcome of the Business Court’s designation decision. (In the past, we have written about a designation order dealing with the interplay between departing-employee cases and section 75-1.1.) Nevertheless, we think the Stout decision is worthy of discussion because it illustrates the importance of understanding the process for designating a case to the Business Court, where section 75-1.1 claims are often litigated.
In this post, we examine what went wrong in Stout and offer some practice pointers on the Business Court designation process. We begin with a high-level overview of the designation process to give some context for the Stout decision.
Overview of the Business Court Designation Process
The most common way to get a case into the Business Court is by requesting to have the case designated as a “mandatory complex business case” under the designation statute, section 7A-45.4. To do this, you must file and serve a notice of designation, which should state that the case qualifies for designation under either subsection (a) or (b) of the designation statute (or both). Note that subsection (d) specifies when the notice must be filed, and the timing depends on which party is seeking the designation (spoiler alert: this was an issue in Stout).
Subsection (a) states that a party “may” designate a case as a mandatory complex business case if it involves a material issue related to any of the types of disputes listed under this subsection. Subsection (b) identifies certain cases that “shall be designated” as mandatory complex business cases. Subsection (b) cases are sometimes called “mandatory-mandatory” complex business cases because they are required to be designated to the Business Court.
Another way to get a case designated to the Business Court is by motion under General Rule of Practice 2.1, which allows a Business Court Judge to preside over “exceptional” or “complex business” cases. Rule 2.1 lays out several factors for determining whether a case should be designated as an exceptional or a complex business case. These factors include the number of parties and the complexity of the legal issues.
In the olden days, before the enactment of section 7A-45.4, Rule 2.1 was the only avenue for seeking Business Court designation. Although Business Court designation under Rule 2.1 is less common these days, Rule 2.1 should not be discounted because sometimes it can provide a pathway to the Business Court when the requirements of section 7A-45.4 are not otherwise met.
In any event, the Chief Justice of the North Carolina Supreme Court will need to approve the designation, regardless of whether section 7A-45.4 or Rule 2.1 is invoked. And if the Chief Justice is not convinced that a case belongs in the Business Court, that makes it harder to obtain Business Court designation. This brings us to Stout.
The Cast of Characters
In April 2020, plaintiffs Stuart Stout and Shelby Stout, their production company, and executive producer Jonah Hirsch sued defendants Alcon Entertainment, LLC, Alcon Media Group, LLC, Andrew Kosove, Broderick Johnson, Walden Media, LLC, and Steven Wegner for fraud, negligent misrepresentation, unfair and deceptive trade practices, and unjust enrichment. The plaintiffs alleged that the defendants committed fraud in connection with the production of a screenplay about the Stouts’ late daughter that ultimately fell through.
The Opening Salvo
In June 2020, Alcon Entertainment, Alcon Media, Kosove, and Johnson filed a notice of designation, requesting Business Court designation based on the plaintiffs’ claims under subsection (a)(5) of the designation statute, which deals with certain disputes involving intellectual property.
Instead of approving the designation, then-Chief Justice Cheri Beasley issued a Determination Order that directed the Chief Business Court Judge to decide whether the case belonged in the Business Court. In short order, the Chief Business Court Judge ruled that designation was not proper because the plaintiffs’ claims were not sufficiently connected to the “underlying intellectual property aspects” of the screenplay about the Stouts’ daughter, as required under subsection (a)(5). As a result, the case was not designated to the Business Court and proceeded in Superior Court for more than a year.
A Second Bite at the Apple
In October 2021, the remaining defendants—Alcon Entertainment and Wegner—filed a new notice of designation, this time requesting designation under subsections (a)(2) (disputes involving securities), (a)(5) (again), and (b)(2), which requires designation when one of the disputes described in subsection (a)(1), (2), (3), (4), (5), or (8) involves an amount in controversy of at least $5 million. They filed the new notice after a presiding Superior Court Judge suggested during a scheduling conference that Alcon Entertainment should consider seeking Business Court designation based on the alleged damages at issue, $33 million.
Chief Justice Paul Newby did not approve the designation and, like Chief Justice Beasley did the first time around, issued a Determination Order. The Chief Business Court Judge was, once again, tasked with determining whether the case belonged in the Business Court.
The defendants based the new notice of designation on counterclaims that Alcon Entertainment asserted against the plaintiffs. However, they did not file their notice at the same time that Alcon Entertainment filed its counterclaims, as required by subsection (d)(1) of the designation statute. Instead, they filed the notice more than six months after the counterclaims had been filed. The notice was thus untimely.
The defendants had a potential lifeline, though, in the form of subsection (g) of the designation statute, which still permits designation when a “mandatory-mandatory” complex business case “is not so designated.” Because the defendants also requested designation under subsection (b)(2), the Chief Business Court Judge analyzed whether that subsection provided a basis for designating the case.
It did not. The Chief Business Court Judge concluded that the case did not meet the $5 million amount-in-controversy requirement in subsection (b)(2). But wait, what about those alleged $33 million in damages? The Chief Business Court Judge addressed this issue by explaining that subsection (b)(2) is clear that the amount in controversy that triggers the $5 million threshold must appear in the operative pleading—specifically, in the prayer for relief. In this case, the reference to $33 million appeared in Stuart Stout’s response to an interrogatory, not in the operative complaint. Not to mention, the defendants based their new notice of designation on Alcon Entertainment’s counterclaims, and those counterclaims also did not plead the necessary amount in controversy.
For these reasons, the case was, yet again, not allowed to proceed in the Business Court.
Some Practice Pointers
The Stout ruling presents a good opportunity to offer some practice pointers on designating a case to the Business Court.
- Before seeking Business Court designation under section 7A-45.4, be sure to review the statute’s requirements. Some requirements, like when to file the notice of designation, are apparent on the face of the statute. Other requirements, like the amount-in-controversy requirement addressed in Stout, require a careful reading of the statute.
- The Business Court’s orders addressing whether cases qualify as complex business cases are great sources of information for understanding the more nuanced requirements of section 7A-45.4. These orders are available on the Business Court’s website under orders of significance. As the name suggests, orders of significance pertain to significant matters that the Business Court has considered, such as designation requirements, discovery disputes, and preliminary requests for injunctive relief, to name a few. Note that orders of significance are different than the Business Court’s lengthier opinions, which, for certain motions, the Business Court is required by statute to issue. In contrast, there is no statutory requirement for the Business Court to classify and issue any of its rulings as an order of significance.
- Other helpful sources of information for the designation process include Business Court Rule 2 and the FAQs, Designation Procedure sheet, and Notice of Designation Template that are available on the Court’s website. Reviewing these sources may help you avoid the outcome in Stout, or, conversely, achieve that outcome if you are opposing Business Court designation.
- Finally, remember that Rule 2.1 of the General Rules of Practice can be your friend. In Stout, for example, the Chief Business Court Judge issued his ruling without prejudice to Alcon Entertainment and Wegner’s ability to seek designation under Rule 2.1. Perhaps the third time’s the charm.
Author: Agustin Martinez