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Civil Practice – Attorneys’ Fees – Baseless Claims – Failure to Withdraw – Unfair Trade Practices – Labor & Employment – Severance Contract

McKinnon v. CV Industries (Lawyers Weekly No. 12-15-0630, 21 pp.) (James L. Gale, J.) 2012 NCBC 36

Holding: Where plaintiff persisted in prosecuting his claims well after he should have realized they were baseless, he must pay some of the attorneys’ fees incurred by defendant after the entry of summary judgment.

The court awards defendant $40,000 in attorney’s fees under G.S. § 6-21.5 or, alternatively, under G.S. § 75-16.1. The court denies defendant’s motion for attorney’s fees under N.C. R. Civ. P. 11 and G.S. § 1D-45. Plaintiff’s motion for attorney’s fees is denied.

Initially, plaintiff is not entitled to attorney’s fees. Defendant did file a counterclaim based on plaintiff’s work with a former co-worker, and plaintiff produced a letter from defendant expressly agreeing to allow plaintiff to do such work. Nevertheless, defendant showed that it reviewed its files before making the claim and promptly withdrew the claim when plaintiff produced the letter.

Plaintiff’s claim for promissory fraud was based on his allegation that, when the parties negotiated plaintiff’s severance contract, the defendant-employer never intended to abide by it. In fact, defendant clearly complied with several parts of the contract, and plaintiff relied only on subsequent conduct in his attempt to show promissory fraud as to the contract’s stock plan.

Plaintiff’s breach of contract claim was based on the parties’ agreement to suspend defendant’s employee stock plan as to plaintiff while plaintiff was competing with defendant, and to reinstate the stock plan once plaintiff stopped competing, but only if defendant’s stock price exceeded $9.90 on December 31 of the year before plaintiff stopped competing with defendant.

Defendant, a manufacturer of furniture and furniture fabric, considered plaintiff to have stopped competing with it in 2001 when he went to work for a company that made fiber. The fiber company supplied to defendant’s fabric manufacturer for a time. Defendant’s stock price was under $9.90 on Dec. 31, 2000.

Plaintiff contended that he remained in competition with defendant, through his work for the fiber company and various consulting work, until June 2008. Defendant’s stock price exceeded the $9.90 threshold on Dec. 31, 2007.

Plaintiff was never able to define competition so as to include his work at the fiber company unless the definition also encompassed the work he continued to do after June 2008. Nonetheless, plaintiff appealed this court’s entry of summary judgment against him to the Court of Appeals and unsuccessfully petitioned the N.C. Supreme Court for review.

While it is a close call, the court concludes that there is no adequate basis to conclude that plaintiff did not have an initial belief that he could prove after discovery that he was competing within the meaning of the parties’ contract. Although the promissory fraud claim is another close call, the court concludes that Rule 11 sanctions are not appropriate.

Where the punitive damages claim did not appear to independently influence the course of the litigation, the court will not award attorneys’ fees under G.S. § 1D-45.

Unlike Rule 11, which looks only at a pleading at the time it was filed, § 6-21.5 requires an evaluation of 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. A similar inquiry is appropriate in the discretionary determination whether to award fees pursuant to § 75.16.1.

Plaintiff either knew or should have known that the fiber company did not compete with defendant. Rather than admit this deficiency, plaintiff tried to shift his legal theory of competition and asserted elusive, evasive, and self-serving reasons for his definition.

While being given every opportunity to do so through the summary judgment process, plaintiff could marshal no evidence that even colorably supported a promissory fraud or Chapter 75 claim and he was altogether unable to present a cogent definition of “competition” that could simultaneously support his contract claim and condone his continuing conduct at a time he contended he was no longer in competition.

The court in its discretion concludes that defendant should be awarded $40,000 in fees. This appears to be less than the amount defendant actually expended in defending the case after the entry of summary judgment.

The court’s award would alternatively be supported as a discretionary award under § 75-16.1.


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