A Greensboro company acted in a bad faith when it raced to the courthouse to file a voluntary dismissal of its complaint mere hours after a judge had granted the defendants’ motion to dismiss their claims, and before the defendants’ counsel had a chance to draft a written order for the judge to sign, the North Carolina Court of Appeals has ruled.
The court, in a unanimous decision published Dec. 19, affirmed the trial judge’s ruling vacating the voluntary dismissal, closing off one creative avenue for plaintiffs looking to avoid a dismissal of their claims. But the company was ultimately able to secure the relief it was seeking when the appeals court overturned the trial court’s ruling dismissing its claims against one of its former employees.
Market America, a multi-level marketing company, sued Pamela Lee, a former “certified trainer,” and her corporate entity, alleging that she violated her written agreement with the company, which included a covenant not to compete. In July 2016 Guilford County Superior Court Judge Patrice Hinnant granted Lee’s motion to dismiss the complaint, ruling that the territorial restrictions contained in the agreement were unreasonable and overly broad as a matter of law.
Hinnant announced her decision verbally from the bench and instructed Lee’s counsel to draft a written order. Within hours, and before the order was drawn up, Market America filed a notice of voluntary dismissal stating that it was dismissing without prejudice all of its claims pursuant to Rule 41(a)(1) of the state’s rules of civil procedure.
Rule 41 grants plaintiffs one opportunity to voluntarily dismiss a claim at any time before resting its case, but the state’s Supreme Court has imposed two limitations on this general rule: dismissals may not be taken in bad faith, and they must be done prior to a trial court’s ruling dismissing the claim or otherwise ruling against the plaintiff. Hinnant granted Lee’s motion to vacate the notice of voluntary dismissal on the ground that the dismissal was ineffective because it was not taken in good faith.
On appeal, Market America contended that no North Carolina appellate court had ever published an opinion invalidating, because of the bad faith exception, a voluntary dismissal of the sort that the company had attempted to procure. The appeals panel did note, however, that in 2012 the court had issued an unpublished opinion in a case where the plaintiff had attempted the exact same maneuver, and the appeals court affirmed a similar ruling that the voluntary dismissal was void due to bad faith.
Judge Mark Davis, writing for the court, noted that unpublished opinions are not binding precedent, but said that the earlier panel’s reasoning was persuasive. Davis said that while the rules of civil procedure clearly permit plaintiffs to voluntarily dismiss their claims for a variety of reasons, such a dismissal must be taken in good faith. Allowing a plaintiff to voluntarily dismiss a complaint after a judge had ruled against them on the merits would “make a mockery” of the judge’s ruling, he said.
“Taking a voluntary dismissal based on concerns about the potential for a future adverse ruling by the Court is permissible. Dismissing an action after such a ruling has actually been announced by the court is not,” Davis wrote. “Once the trial court has informed the parties of its ruling against the plaintiff on the defendant’s dispositive motion, Rule 41 does not permit the proceeding to devolve into a footrace between counsel to see whether a notice of voluntary dismissal can be filed before the court’s ruling is memorialized in a written order and filed with the clerk of court.”
As fate would have it, however, the voluntary dismissal gambit ultimately wound up being a moot point. The judges wound up overturning Hinnant’s ruling dismissing Market America’s claims under its covenant not to compete at this stage of the litigation. The court held that a ruling on the enforceability of a covenant not to compete cannot be made at the pleadings stage because the parties need to present evidence to show the reasonableness, or not, of the restrictions contained within them.
“In this case, it is impossible to determine based solely on the four corners of the complaint whether the territorial restrictions in the Certified Trainer Agreement are appropriately tailored to protect Market America’s legitimate business interests,” Davis wrote. “Without [more] information, the potential overbreadth of the Certified Trainer Agreement’s restrictions on Lee cannot be meaningfully assessed.”
Marc Gustafson of Essex Richards in Charlotte represented Lee. Gustafson said that he hoped the state’s Supreme Court would consider the question about covenants not to compete and take a different view. He also said that he wished the court had taken a closer look at whether it had jurisdiction to consider the case at this time, as some of Market America’s other claims against Lee are still pending. As for the voluntary dismissal issue, Gustafson said that he had never previously had a case in which an opposing party had attempted such a move.
“I think it settles the law on this issue,” Gustafson said. “I’ve never had any experience with it, and obviously was surprised by the move.”
Press Millen and Sam Hartzell of Womble Bond Dickinson in Raleigh represented Market America. Millen said he was pleased by the court’s decision to overturn the trial court’s ruling on the merits.
“The ruling with regard to the covenant not to compete—that there’s no way to dismiss a claim at that stage and that it requires an understanding and application of information that was not available to the trial court at the time of the ruling—is consistent with any number of decisions by the North Carolina appellate court on the issue of analysis of covenants not to compete, and so in that respect, I think it’s entirely consistent with the law as it has existed for many years in North Carolina,” Millen said.
The 23-page decision is Market America, Inc. v. Lee (Lawyers Weekly No. 011-389-17). The full text of the opinion is available online at nclawyersweekly.com.
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