Comput. Design & Integration, LLC v. Brown

2018 NCBC 128

• Court: North Carolina Business Court
• Decided: December 10, 2018
• Docket: 16-CVS-11847
• Status: Published

Opinion

Comput. Design & Integration, LLC v. Brown, 2018 NCBC 128.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 16 CVS 11847

COMPUTER DESIGN & INTEGRATION, LLC and COMPUTER DESIGN & INTEGRATION SOUTHEAST, LLC,

Plaintiffs,

v.

DAVID A. BROWN; MARCUS JACOBY; and ROVE, LLC, ORDER AND OPINION ON Defendants, CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT1 DAVID A. BROWN and MARCUS JACOBY,

Third-Party Plaintiffs,

ERIC BAKKER and BRIAN T. REID, CPA,

Third-Party Defendants,

COMPUTER DESIGN & INTEGRATION SOUTHEAST, LLC, derivatively through DAVID A. BROWN,

Derivative Plaintiff,

1 Recognizing that this Order and Opinion cites and discusses the subject matter of certain documents that the Court has previously allowed to remain filed under seal in this case, the Court elected to file this Order and Opinion under seal on December 10, 2018. The Court permitted the parties an opportunity to advise whether the Order and Opinion contained confidential information that any party contended should be redacted from a public version of this document. On December 12, 2018, Defendants requested the Court redact the names of certain non-party entities. After due consideration, the Court denied Defendants’ request by Order dated December 14, 2018 (ECF No. 181), and this Order and Opinion is therefore filed, without redactions, as a matter of public record. ERIC BAKKER; BRIAN T. REID, CPA (individually); ACCOUNTING OFFICES OF BRIAN T. REID, CPA; and NIGRO & REID,

Derivative Third-Party Defendants.

1. THIS MATTER is before the Court upon the following motions in the

above-captioned case: (i) Plaintiffs Computer Design & Integration, LLC (“CDI”) and

Computer Design & Integration Southeast, LLC (“CDISE”) (collectively, “Plaintiffs”)

and Third-Party Defendants Eric Bakker (“Bakker”), Brian T. Reid (“Reid”),

Accounting Offices of Brian T. Reid, CPA (“Reid Accounting”), and Nigro & Reid’s

(“N&R”) (collectively, “Third-Party Defendants”) Motion for Partial Summary

Judgment (the “Plaintiffs’ Motion”)2 and (ii) Defendants David Brown (“Brown”),

Marcus Jacoby (“Jacoby”), and Rove, LLC’s (“Rove”) (collectively, “Defendants”)

Motion for Partial Summary Judgment (the “Defendants’ Motion”), (together with the

Plaintiffs’ Motion, the “Motions”).

2. Having considered the Motions, the parties’ briefs, exhibits, and affidavits

in support of and in opposition to the Motions, the pleadings, the arguments of

counsel at the March 1, 2018 hearing on the Motions, and other appropriate matters

of record, the Court hereby GRANTS in part and DENIES in part each of the

parties’ Motions.

2 The Court notes that Plaintiffs and the Third-Party Defendants jointly briefed the present Motions and have substantially aligned interests. For ease of reference, the Court will attribute arguments advanced by Plaintiffs and the Third-Party Defendants solely to Plaintiffs. Bell, Davis and Pitt, P.A., by Edward B. Davis and Joshua B. Durham, for Plaintiffs Computer Design & Integration, LLC and Computer Design & Integration Southeast, LLC, Third-Party Defendants Brian T. Reid and Eric Bakker, and Derivative Defendants Accounting Offices of Brian T. Reid, CPA and Nigro & Reid.

Alexander Ricks, PLLC, by Mary K. Mandeville, Alice C. Richey, and Meredith S. Jeffries, for Defendants David Brown, Marcus Jacoby, and Rove, LLC.

Bledsoe, Chief Judge.

I.

FACTUAL AND PROCEDURAL BACKGROUND

3. The Court does not make findings of fact on motions for summary judgment.

See Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C. App. 138, 142, 215 S.E.2d

162, 165 (1975). Instead, the Court summarizes the facts before it, noting undisputed

and contested facts, to provide context for the claims and its ruling on the

Motions. Id.

4. CDI and Brown are the two members of CDISE. This action arises out of

Brown’s failed buyout of CDI’s interest in CDISE. In anticipation of the buyout,

Brown created Rove to operate the CDISE business. During negotiations, Brown

began preparations to launch Rove, including by contacting CDISE’s customers,

employees, and vendors and advising that CDISE was or would soon become Rove.

After the buyout failed, Brown left CDISE’s employment and began competing with

CDISE through Rove in a number of ways, including by calling on CDISE’s customers

and hiring a number of CDISE employees. CDI and CDISE subsequently initiated

this action asserting claims against Brown, Rove, and CDISE’s former employee, Jacoby. Brown and others responded with counterclaims, third-party claims, and

derivative third-party claims. Through the Motions, all parties seek partial summary

judgment.

CDI and the Creation of CDISE

5. CDI is a New York limited liability company (“LLC”) with its principal place

of business in Bergen County, New Jersey. (Compl.3 ¶ 1, ECF No. 1.) CDI designs,

deploys, and manages multiplatform hybrid IT solutions for businesses and often

partners with technology companies in order to address the needs of its customers.

(Compl. ¶ 6.) In particular, CDI is a “Value Added Reseller,” or “VAR.” (Ryan Aff.

¶ 3, ECF No. 77.) VARs resell hardware from technology manufacturers but include

additional services with the sale, such as design, installation, and maintenance

services. (Ryan Aff. ¶ 4.)

6. CDI organized CDISE as a North Carolina LLC with Brown’s assistance in

the fall of 2010 to expand CDI’s business into the southeastern United States.

(Compl. ¶¶ 2, 8–10.) Brown is a citizen and resident of Mecklenburg County, North

Carolina, (Compl. ¶ 3), and CDISE maintains its principal place of business in

Mecklenburg County, (Compl. ¶ 2).

7. CDI and Brown entered into a written operating agreement for CDISE dated

November 5, 2010 (the “Operating Agreement”). (See Defs.’ Mot. Dismiss, Answer,

Countercls., and Third-Party Compl., Ex. A, at 1 [hereinafter “Operating

Agreement”], ECF No. 22.6.) The Operating Agreement provided that Brown and

3 Plaintiffs’ Complaint was verified under oath by Erik Bakker, CDI’s President. CDI each held a fifty-percent membership interest in CDISE. (Operating Agreement

A-1.) Under the Operating Agreement, Brown agreed to serve as President and

handle the day-to-day management of CDISE, and Bakker, a citizen and resident of

New York, (Defs.’ Countercls. and Third-Party Compl. ¶ 6 [hereinafter “Countercls.”],

ECF No. 22), was appointed as CDISE’s Vice President, (Operating Agreement

§§ 6.3.2–6.3.3).4

8. Under the Operating Agreement, CDI became the Managing Member of

CDISE, a position defined in the Operating Agreement as follows:

[T]he Managing Member shall have full, complete and exclusive authority, power and discretion to direct, manage and control the business, affairs and assets of [CDISE], to exercise any of the powers of [CDISE], to make all decisions regarding those matters, and to perform any and all other acts or activities it deems necessary, appropriate, proper, advisable or convenient with respect thereto.

(Operating Agreement § 6.1.1.)

9. The Operating Agreement further provided that CDI would assume the role

of “Tax Matters Partner” for CDISE, which required CDI to represent CDISE “in

connection with all examinations of [CDISE]’s affairs by tax authorities, including

any resulting judicial and administrative proceedings, and to expend [CDISE] funds

for professional services and costs associated therewith.” (Operating Agreement

§ 11.5.) CDI also assumed accounting responsibilities that included “caus[ing] the

books and records of [CDISE] to be maintained in accordance with the accrual basis

of accounting.” (Operating Agreement § 11.2.)

4Brown served as CDISE’s President until he resigned on June 16, 2016, (Brown Aff. ¶ 6, ECF No. 65), at which time Bakker took over as CDISE’s President, (Bakker Aff. ¶ 2, ECF No. 40). 10. Reid is a citizen and resident of Bergen County, New Jersey, (Countercls.

¶ 7), and the Chief Financial Officer of CDI, (Reid Aff. ¶ 2, ECF No. 149). Reid is also

a principal of Reid Accounting, an accounting firm located and operating in New

Jersey, (Am. Countercls. and Third Party Compl. ¶ 169 [hereinafter “Am.

Countercls.”], ECF No. 89), and was formerly an owner of N&R, an accounting firm

also located in New Jersey, (Am. Countercls. ¶ 170). By virtue of his position, and

acting through either Reid Accounting or N&R, Reid assists CDI in fulfilling its duties

under CDISE’s Operating Agreement, which includes handling certain accounting,

tax, and financial matters. (Derivative Third-Party Defs.’ Answer ¶ 174, ECF No.

96.)

11. Jacoby is a citizen and resident of Rowan County, North Carolina, (Defs.’

Answer ¶ 4, ECF No. 22), who started working for CDISE in February 2011, (Jacoby

Aff. ¶ 3, ECF No. 63). He eventually became CDISE’s Vice President of Sales. (Jacoby

Aff. ¶ 3.) Jacoby held this position until his resignation from CDISE on June 22,

2016. (Jacoby Aff. ¶ 3.)

12. On October 27, 2015, Jacoby signed a standard confidentiality agreement

with CDISE (the “Confidentiality Agreement”). (Bakker Aff. ¶ 9, ECF No. 40.) Jacoby

and certain other CDISE employees signed Confidentiality Agreements, which were

required of CDISE employees by new, larger customers as a condition of working with

those accounts. (Exs. Reid Aff. 7–8, ECF No. 151.) Certain CDISE employees also

signed covenants not to compete with the company. (Brown Aff. ¶ 98 [hereinafter

“1st Brown Aff.”], ECF No. 65.) Neither Brown nor Jacoby entered non-competition, customer non-solicitation, or employee non-solicitation agreements with CDISE.

(Defs.’ Mot. Summ. J., Ex. 3, at 132:8–17 [hereinafter “CDI Dep. I”], ECF No. 116.4;

Jacoby Aff. ¶ 21.)

CDI’s and CDISE’s Tax Issues

13. CDISE’s revenues grew from $1.2 million in 2011 to over $50 million by

2015. (Exs. Pls.’ Mot. Summ. J. – Dep. Trs., Brown Dep. Ex., at 27:11–34:11

[hereinafter “Brown Dep. I”], ECF No. 110.) During that time, CDISE failed to remit

sales and use taxes to proper taxing authorities—including the North and South

Carolina Departments of Revenue—until October 2015, even though CDISE’s sales

taxes were required to be paid either quarterly or monthly. (Defs.’ Br. Opp’n Pls.’

Mot. Summ. J., Ex. 8, at 223:13–18, 238:4–21 [hereinafter “CDI Dep. II”], ECF No.

156.9; Brown Dep. I, at 27:11–30:13.)

14. On November 29, 2017, Brown was notified by the South Carolina

Department of Revenue Collection that CDISE was delinquent on its quarterly

employee withholding tax for the fourth quarter in 2014 and the third quarter in

2015. (Brown Aff. ¶¶ 2–6 [hereinafter “2nd Brown Aff.”], ECF No. 158.)

15. Reid, as CFO of CDI, was responsible for handling remittance of CDISE’s

sales taxes and fulfilling CDISE’s state tax reporting requirements. (CDI Dep. II, at

39:21–25, 221:7–222:24.) Reid was also responsible for preparing and providing

accurate financial statements to the members of CDISE, including Brown, on a

quarterly and annual basis. (CDI Dep. II, at 23:1–25:13, 56:8–57:4.) 16. Brown received one such statement, an annual balance sheet for the year

2014, sometime in March 2015. (2nd Brown Aff. ¶¶ 8, 10.) The balance sheet Brown

received omitted a sales tax payable in the amount of $945,339.61 that CDISE owed

at the time. (2nd Brown Aff. ¶ 8; Under Seal – Exs. Pls.’ Mot. Summ. J., Ex. 149

[hereinafter “Balance Sheet”], ECF No. 114.) A document titled “Audit Trail” shows

that on March 2, 2015 an individual made a journal entry in CDISE’s QuickBooks

file that reflected a payment made from CDISE’s Sales Tax Payable Account in the

amount of $945,339.61 to the United States Treasury (the “Journal Entry”). (Under

Seal – Exs. Pls.’ Mot. Summ. J., Ex. 151, at 1 [hereinafter “Audit Trail”], ECF No.

114.) One minute and twenty-one seconds later, however, the Journal Entry was

deleted. (Audit Trail 1; CDI Dep. II, at 114:15–18; Rogers Aff. ¶ 4, ECF No. 157.) The

balance sheet Brown received from CDI appears to have been printed out during the

eighty-one seconds the Journal Entry appeared on the balance sheet. (2nd Brown Aff.

¶¶ 9–10; see Balance Sheet 1.) The balance sheet tendered to Brown omitted the tax

payable to the U.S. Treasury. (2nd Brown Aff. ¶ 8; CDI Dep. II, at 109:8–116:16.)

17. CDI also experienced tax problems itself. On March 17, 2015, the New York

State Department of Taxation and Finance (“New York Tax Department”) issued a

tax warrant against CDI in the amount of $386,145.47. (Vecchio Aff. ¶ 3, ECF No.

118; see Vecchio Aff., Ex. D, ECF No. 118.4.) The March 2015 tax warrant was

docketed with the Albany, New York County Clerk of Court on March 17, 2015 and

filed with the New York Department of State on March 18, 2015. (Vecchio Aff. ¶¶ 3–

4; see Vecchio Aff., Exs. A–B, ECF Nos. 118.1, 118.2.) On May 27, 2015, the New York Tax Department issued a second tax warrant against CDI in the amount of

$888,361.52 (collectively with the March 2015 tax warrant, the “New York Tax

Warrants”). (Vecchio Aff. ¶ 3; see Vecchio Aff., Ex. E, ECF No. 118.5.) The May 2015

tax warrant was docketed with the Albany, New York County Clerk of Court on May

27, 2015 and filed with the New York Department of State on May 28, 2015. (Vecchio

Aff. ¶¶ 3–4; see Vecchio Aff., Exs. A–B.)

Brown’s Negotiations with CDI for the Acquisition of CDISE

18. In the fall of 2015, Brown and CDI began negotiating Brown’s purchase of

CDI’s 50% interest in CDISE. (Countercls. ¶¶ 40–41.) In December 2015, Brown and

CDI signed a letter of intent whereby Brown, or a new entity to be formed, would

acquire CDISE’s assets for $16 million (the “2015 Term Sheet”). (Ex. Pls.’ Mot.

Summ. J. – Non-confidential Dep. Exs., Ex. 107 [hereinafter “2015 Term Sheet”], ECF

No. 111.) The 2015 Term Sheet expressly provided that its terms were non-binding.

(2015 Term Sheet 6.)

19. During the acquisition negotiations, Brown conducted due diligence with

legal assistance from Alexander Ricks PLLC and accounting assistance from Potter

& Company. (1st Brown Aff. ¶ 46; Under Seal – Exs. Pls.’ Mot. Summ. J., Ex. 222,

ECF No. 114.) The 2015 Term Sheet provided that Brown and his “Representatives”

would have full and complete access to all of the books, records, properties, and assets

of CDISE to conduct due diligence. (2015 Term Sheet 5.) As a result, Brown and his

team received detailed financial information concerning CDISE, including its

financial history, profit and loss information, and revenues. (Reid Aff. ¶ 3.) The 2015 Term Sheet subjected Brown and his team to confidentiality and non-disclosure

obligations. (2015 Term Sheet 6.)

20. In February 2016, during due diligence, Reid provided Brown with the 2015

annual financial statements for CDISE. (1st Brown Aff. ¶ 56.) The 2015 annual

financial statements showed that CDISE’s September 2015 financial statements

omitted approximately $1 million of costs and expenses. (1st Brown Aff. ¶ 56.) This

and CDISE’s tax issues prompted further negotiations that led to the creation of a

new term sheet on April 1, 2016 (the “2016 Term Sheet”). (1st Brown Aff. ¶¶ 56–59.)

The purchase price in the 2016 Term Sheet was reduced to $12.5 million. (1st Brown

Aff. ¶ 59; see Ex. Pls.’ Mot. Summ. J. – Non-confidential Dep. Exs., Ex. 108

[hereinafter “2016 Term Sheet”], ECF No. 111.)

Creation of Rove

21. Brown formed Brown Technology Group, LLC, now known as Rove, LLC,

under North Carolina law in February 2016 in anticipation of his acquisition of

CDISE. (1st Brown Aff. ¶ 50.) Brown has at all times served as the managing

member and President of Rove. (Defs.’ Answer ¶ 5.) Brown’s plan was for CDISE to

cease its operations after the acquisition and for Brown to continue those operations

through Rove. (Defs.’ Br. Opp’n Pls.’ Mot. Summ. J., Ex. 1, at 143:18–144:23

[hereinafter “Brown Dep. II”], ECF No. 156.2.)

22. During the first half of 2016, Brown and others employed by or associated

with Rove and/or CDISE worked on the anticipated acquisition and subsequent

transition. (1st Brown Aff. ¶ 48; see Brown Dep. II, at 81:9–82:19.) Brown hired several employees specifically to work for Rove, including Brian Calfo (“Calfo”) to

head Rove’s operations and quotes and Chelsea Cancelliere (“Cancelliere”) to serve

as a Rove inside sales representative. (Bakker Aff. ¶ 8; 1st Brown Aff. ¶ 52.) Both

Cancelliere and Calfo had full access to CDISE’s sales system to assist with the

anticipated acquisition. (Bakker Aff. ¶ 8; Bakker Aff. Exs., at 57–58, ECF No. 40.)

23. During this transition period, Rove employees exchanged numerous e-mails

with attachments containing sensitive CDISE information. For instance, on May 4,

2016, Jacoby sent an e-mail to Brown and Rebecca Keyser (“Keyser”), a former CDISE

employee who began working for Rove, containing a list of CDISE’s customer

opportunities and the work associated with each customer. (Bakker Aff. –

Confidential Exs., at 119–28, ECF No. 41.) On May 17, 2016, Keyser sent an e-mail

using a Rove e-mail address to Brown that contained an attachment labeled “2016

Pipeline,” which included specific information regarding CDISE’s customers and

accounts. (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 65, at 138–40, ECF No. 138.) Also in

May 2016, Keyser received an e-mail through her Rove e-mail address with the

attachment “rove – 13.pdf,” which is a spreadsheet labeled “Employee Earnings

Record” containing, among other things, information reflecting CDISE employees’

hours, earnings, reimbursements, other payments, tax withholdings, and employee

benefit deductions for 2013. (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 71, at 141–84.)

24. Brown and his transition team also set up a Quotewerks system, which Rove

uses to prepare quotes for customers. (Pls.’ Dep. Excerpts (Sealed), at 44–46, ECF

No. 141.) During the transition period, the Quotewerks system pulled customer information from CDISE’s comparable system—Connectwise. (Pls.’ Dep. Excerpts

(Sealed), at 45–46.)

25. Also in the transition to Rove’s launch, in June 2016, Rove employees and

agents obtained a number of CDISE’s pricing proposals—known as Statements of

Work (“SOW”)—and quotes for existing and potential CDISE customers and sent

those SOWs and quotes to customers using Rove e-mail addresses. (Answer ¶ 26;

Durham Aff. – Confidential Exs., at 77–101, 102–23, 124–43, 144–48, 149–55, 156–

72, 189–202, 203–41, 242–48, ECF No. 43.) Rove personnel represented to these

customers that CDISE had been purchased by Rove and that, “going forward,” CDISE

would be known as Rove. (Pls.’ Dep. Exs. Vol. 1, Ex. 93, ECF No. 137; Exs. Durham

Aff., at 6, ECF No. 147.)

26. Despite the efforts to transition CDISE into Rove, the acquisition never

occurred. Brown resigned as President of CDISE on June 16, 2016. (1st Brown Aff.

¶¶ 75–76.) Over the following weekend, Brown recruited CDISE personnel to join

Rove. (Bakker Aff. ¶ 16.) On Sunday, June 19, 2016, a total of twenty-four CDISE

employees resigned to join Rove. (Bakker Aff. ¶ 16.) Brown had determined which

CDISE employees did not hold covenants not to compete with CDISE, and he offered

positions at Rove to only those employees. (1st Brown Aff. ¶ 98.)

27. On June 20, 2016, Rove was officially opened for business. (Exs. Pls.’ Mot.

Summ. J. – Dep. Trs., Monza Dep. Ex., at 55:15–23 [hereinafter “Monza Dep.”], ECF

No. 110.) Jacoby resigned from CDISE on June 22, 2016 and became Rove’s Vice

President shortly thereafter. (Jacoby Aff. ¶ 3.) 28. In the immediate aftermath of the Rove/CDISE split, Rove employees

removed certain CDISE computer equipment from CDISE’s office, including a CISCO

server, certain Meraki advanced security gear, and computer drives that were to be

included in the CISCO server. (Bakker Aff. ¶ 18.) Defendants returned these items

after demand by CDISE or its counsel. (Bakker Aff. ¶ 18.) Brown and Jacoby also

removed equipment belonging to Sunbelt Rentals (“Sunbelt”) that CDISE had been

working to install under a contract with Sunbelt. (Bakker Aff. ¶ 18; Exs. Pls.’ Mot.

Summ. J. – Dep. Trs., Jacoby Dep. Ex., at 116:18–130:25, ECF No. 110.)

29. In the ensuing months, Rove obtained contracts with Octapharma, Ally, and

Sunbelt—three customers that received Rove’s SOWs and quotes in June 2016.

(Confidential Exs. Durham Aff. (Sealed), at 187, 199–200, ECF No. 148; Pls.’ Dep.

Exs. Vol. 3 (Sealed), Exs. 104, 193, 194, ECF No. 139.)

Procedural Background

30. Plaintiffs filed a Verified Complaint initiating this action on June 30, 2016,

asserting claims against (i) Brown for breach of the Operating Agreement, failure to

negotiate in good faith, breach of the covenant of good faith and fair dealing, and

breach of fiduciary duty; (ii) Jacoby for breach of the Confidentiality Agreement; and

(iii) all Defendants for misappropriation of trade secrets, conversion, tortious

interference with contract, tortious interference with prospective economic relations,

unfair or deceptive trade practices, and injunctive relief.

31. On August 31, 2016, Defendants filed their Answer to Plaintiffs’ Complaint,

and Brown filed counterclaims against Plaintiffs and third-party claims against the Third-Party Defendants, both of which he amended on January 18, 2017.5

Specifically, Brown asserted claims, either directly and/or derivatively on behalf of

CDISE, against (i) CDI for declaratory judgment, breach of the Operating Agreement,

and breach of fiduciary duties; (ii) CDISE for judicial dissolution; (iii) CDI and CDISE

for indemnification and records inspection under N.C. Gen. Stat. § 57D-3-04; (iv) CDI,

Reid, and Bakker for fraud, fraudulent concealment, negligent misrepresentation,

and unfair and deceptive trade practices; (v) CDI, Bakker, Reid, Reid Accounting, and

N&R for mismanagement of CDISE; and (vi) Reid, Reid Accounting, and N&R for

professional negligence.6

32. After the close of discovery, the parties filed the Motions on November 17,

2017.

33. Defendants’ Motion seeks summary judgment on Brown’s individual and

derivative claims for declaratory judgment and Plaintiffs’ claims for breach of the

Operating Agreement, breach of the duty to negotiate in good faith, breach of the

covenant of good faith and fair dealing, misappropriation of trade secrets, tortious

interference with contract, tortious interference with prospective economic

advantage, Jacoby’s breach of the Confidentiality Agreement, and conversion.

5 Although Jacoby also filed counterclaims against Plaintiffs, he has since voluntarily dismissed those claims without prejudice.

6 The Court issued opinions on the parties’ preliminary motions in Computer Design & Integration, LLC v. Brown, 2016 NCBC LEXIS 96 (N.C. Super. Ct. Dec. 6, 2016), and Computer Design & Integration, LLC v. Brown, 2017 NCBC LEXIS 8 (N.C. Super. Ct. Jan. 27, 2017). 34. Plaintiffs’ Motion seeks summary judgment on Brown’s claims for

declaratory judgment, judicial dissolution, fraud, fraudulent concealment, negligent

misrepresentation, unfair and deceptive trade practices, gross mismanagement, and

professional negligence.

35. The Court held a hearing on the Motions on March 1, 2018, at which all

parties were represented by counsel. The Motions are now ripe for resolution.

II.

LEGAL STANDARD

36. Summary judgment is proper only “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that any party is entitled to a

judgment as a matter of law.” N.C. R. Civ. P. 56(c). An issue is genuine if it is

“supported by substantial evidence,” and “an issue is material if the facts alleged

would constitute a legal defense, or would affect the result of the action, or if its

resolution would prevent the party against whom it is resolved from prevailing in the

action[.]” DeWitt v. Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140, 146

(2002) (citations omitted). “Substantial evidence is such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion and means more

than a scintilla or a permissible inference.” Id. (citation and quotation marks

omitted).

37. The Court views the evidence presented “in the light most favorable to the

nonmoving party.” Day v. Rasmussen, 177 N.C. App. 759, 762, 629 S.E.2d 912, 914 (2006). However, affidavits must “set forth such facts as would be admissible in

evidence, and shall show affirmatively that the affiant is competent to testify.” N.C.

R. Civ. P. 56(e).

38. The moving party bears the burden of establishing a lack of any triable issue

and may meet this burden by “proving that an essential element of the opposing

party’s claim is nonexistent, or by showing through discovery that the opposing party

cannot produce evidence to support an essential element of his claim or cannot

surmount an affirmative defense which would bar the claim.” Roumillat v. Simplistic

Enters., Inc., 331 N.C. 57, 62–63, 414 S.E.2d 339, 341–42 (1992).

39. “[O]nce the party seeking summary judgment makes the required showing,

the burden shifts to the nonmoving party to produce a forecast of evidence

demonstrating specific facts, as opposed to allegations, showing that he can at least

establish a prima facie case at trial.” Gaunt v. Pittaway, 139 N.C. App. 778, 784–85,

534 S.E.2d 660, 664 (2000). The nonmoving party “may not rest upon the mere

allegations or denials of his pleading, but his response, by affidavits or as otherwise

provided in [Rule 56], must set forth specific facts showing that there is a genuine

issue for trial. If he does not so respond, summary judgment, if appropriate, shall be

entered against him.” N.C. R. Civ. P. 56(e). Thus, a “motion for summary judgment

allows one party to force his opponent to produce a forecast of evidence which he has

available for presentation at trial to support his claim or defense.” Dixie Chem. Corp.

v. Edwards, 68 N.C. App. 714, 717, 315 S.E.2d 747, 750 (1984). III.

LEGAL ANALYSIS

Defendants’ Motion

1. CDI’s Deemed Withdrawal as a Member of CDISE

40. Defendants first argue that the filing of the New York Tax Warrants caused

CDI’s automatic withdrawal as a member of CDISE under Section 8.10 of the

Operating Agreement. As a result, Defendants contend that Brown, individually, and

derivatively on behalf of CDISE, is entitled to a declaratory judgment that CDI has

withdrawn as a member of CDISE.7 Defendants further contend that, because of that

withdrawal, CDI (i) lacks standing to bring claims on behalf of CDISE or to cause

CDISE to bring claims on its own behalf, thus compelling the dismissal of all claims

asserted on CDISE’s behalf for lack of subject matter jurisdiction; and (ii) cannot

pursue claims premised on its membership interest, thus compelling dismissal of

CDI’s claims against Brown for breach of the Operating Agreement, breach of a duty

to negotiate in good faith, and breach of the covenant of good faith and fair dealing.8

41. “Standing refers to whether a party has a sufficient stake in an otherwise

justiciable controversy such that he or she may properly seek adjudication of the

matter.” Gateway Mgmt. Servs. v. Carrbridge Berkshire Grp., Inc., 2018 NCBC

7 Plaintiffs’ Motion similarly seeks partial summary judgment as to Brown’s counterclaims for declaratory judgment.

8 This Court has previously addressed CDI’s authority under the Operating Agreement to cause CDISE to assert its claims in this action in resolving Defendants’ motion to dismiss under Rule 12(b)(6). See Computer Design & Integration, LLC, 2016 NCBC LEXIS 96, at *6– 11. However, Defendants did not seek dismissal in that motion based on the issuance of the New York Tax Warrants. LEXIS 45, at *15 (N.C. Super. Ct. May 2, 2018) (quoting Am. Woodland Indus., Inc.

v. Tolson, 155 N.C. App. 624, 626, 574 S.E.2d 55, 57 (2002)). “Standing is a necessary

prerequisite to a court’s proper exercise of subject matter jurisdiction,” Neuse River

Found., Inc. v. Smithfield Foods, Inc., 155 N.C. App. 110, 113, 574 S.E.2d 48, 51

(2002), and requires “that the plaintiff have been injured or threatened by injury or

have a statutory right to institute an action,” Bruggeman v. Meditrust Co., 165 N.C.

App. 790, 795, 600 S.E.2d 507, 511 (2004). “Whether a party has standing is a

question of law.” McCrann v. Pinehurst, LLC, 225 N.C. App. 368, 372, 737 S.E.2d

771, 775 (2013). For a plaintiff to have standing to assert a derivative claim on behalf

of an LLC, he “must either be ‘a member of the LLC at the time of the act or omission

for which the proceeding is brought’ or acquire his ownership interest ‘by operation

of law from an ownership interest that was owned by a member at that time.’” Wirth

v. Sunpath, LLC, 2017 NCBC LEXIS 84, at *9 (N.C. Super. Ct. Sept. 14, 2017)

(quoting N.C. Gen. Stat. § 57D-8-01(a)(1)).

42. Here, Section 8.10 of the Operating Agreement, titled “LEGAL

PROCEEDINGS AGAINST MEMBERS,” provides in relevant part that “[t]he

interests of [CDISE] and its Members would be seriously affected by any Transfer of

any Member’s Interest by any legal or equitable proceedings against such Member.”

(Operating Agreement § 8.10.)9 The remainder of Section 8.10 sets forth five events,

each of which will cause a member’s automatic withdrawal as a member of CDISE:

9 The Operating Agreement defines “Interest” as an “ownership interest in [CDISE],” which includes the right to vote, participate in management, and receive information “as provided in this Agreement and under the Act,” and specifies that the ownership interest is “personal [i]n the event that (a) there is a bankruptcy of a Member, (b) any portion of the Interest of any Member is attached, (c) any judgment is obtained in any legal or equitable proceeding against any Member and the sale of any portion of his Interest is contemplated or threatened under legal process as a result of such judgment, (d) any execution process is issued against any Member or against any of his Interest, or (e) there is instituted by or against any Member any other form of legal proceeding or process by which the Transfer of any portion of the Interest of such Member becomes imminent (i.e., such Interest being subject to Transfer either voluntarily or involuntarily within ninety (90) days), then, in any such event, the Member shall be deemed to have withdrawn as a member and the provisions of Section 9.2 shall apply.

(Operating Agreement § 8.10.) Brown contends that the issuance of the New York

Tax Warrants caused CDI’s automatic withdrawal from CDISE under subsections

(b), (c), (d), and (e).

43. As an initial matter, the Court concludes that subsections (b), (c), and (e) of

Section 8.10 are not implicated on the undisputed facts of record here. As noted

previously, CDISE is a North Carolina LLC, and the Operating Agreement provides

that it will be governed by North Carolina law. CDI’s membership interest in CDISE,

therefore, is personal property created and existing under North Carolina law. See

N.C. Gen. Stat. § 57D-5-01 (“An ownership interest [in a North Carolina LLC] is

personal property.”). The North Carolina Limited Liability Company Act (the “LLC

Act”) provides that “the entry of a charging order is the exclusive remedy by which a

judgment creditor of an interest owner may satisfy the judgment from or with the

property.” (Operating Agreement § 1.1.5.) A “Transfer” of an Interest under the Operating Agreement includes “any direct or indirect sale, bequest, assignment, pledge, encumbrance or gift thereof, or attempt to deliver or grant a security interest therein.” (Operating Agreement § 1.1.12.) judgment debtor’s ownership interest [in a North Carolina LLC].”10 N.C. Gen. Stat.

§ 57D-5-03(d). Because it is undisputed that no charging order has been entered here,

Brown’s contention that the New York Tax Warrants attach, contemplate, or threaten

the sale of, or constitute the imminent transfer of, CDI’s membership interest and

thus trigger subsections (b), (c), and (e) is without merit. None of those actions in

New York are effective against CDI’s membership interest in North Carolina in light

of the plain requirements of section 57D-5-03.

44. Unlike subsections (b), (c), and (e), however, subsection (d) is not triggered

solely by action against CDI’s membership interest in CDISE. To the contrary,

subsection (d) provides that withdrawal shall be deemed to occur when “any execution

process is issued against any Member or against any of his Interest[.]” (Operating

Agreement § 8.10(d) (emphasis added).) Under New York law, the filing of a tax

warrant with the clerk of court of a county in the state of New York, as occurred here

(see Vecchio Aff. Exs. A–B), shall be “deemed . . . [a] judgment against the taxpayer

for the tax or other amounts[,]” N.Y. Tax Law § 1092(e). Section 1092(f) of the New

York statute, titled “Execution,” provides that the sheriff “shall thereupon proceed

upon the warrant in all respects, with like effect, and in the same manner prescribed

by law in respect to executions issued against property upon judgment[] of a court of

record[.]” N.Y. Tax Law § 1092(f).

45. Based on the plain language of the New York statute, as well as that of the

Operating Agreement, the Court concludes that the process titled “Execution” set

10But see Drye v. United States, 528 U.S. 49, 52 (1999) (“[S]tate law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States.”). forth in section 1092(f) constitutes an “execution process” as provided in Section

8.10(d) of the Operating Agreement, thus triggering Section 8.10(d) with respect to

CDI’s membership interest.

46. The Court’s conclusion that Section 8.10 was triggered, however, does not

end the inquiry. Plaintiffs further contend that Section 8.10 is void because the

language of the Operating Agreement provides that if a triggering event occurs, “the

Member shall be deemed to have withdrawn as a member and the provisions of

Section 9.2. shall apply,” (Operating Agreement § 8.10 (emphasis added)), and it is

undisputed that the Operating Agreement does not contain a Section 9.2.11 The

parties vigorously dispute the legal ramifications of that omission.

47. Plaintiffs argue that the only way the Court can give effect to Section 8.10

is to supply a missing material term—Section 9.2—and that the Court is prohibited

from doing so under longstanding principles of North Carolina contract law, citing,

in particular, JDH Capital, LLC v. Flowers, in which this Court observed that

“judicial interpolation of terms would amount to the court making a contract for the

parties rather than enforcing something that could properly be regarded as the deal

they had struck.” 2009 NCBC LEXIS 8, at *17–19 (N.C. Super. Ct. Mar. 13, 2009)

(quoting Richard A. Posner, The Law and Economics of Contract Interpretation, 83

Tex. L. Rev. 1581, 1587–88 (2005)). Defendants counter that Section 8.10’s reference

to the non-existent Section 9.2 concerns only what will occur after a member is

11 The only section contained in Article IX of the Operating Agreement is Section 9.1, titled “Covenants.” Section 9.1 memorializes each member’s agreement “not to withdraw or attempt to withdraw from [CDISE]” and contains no language concerning post-withdrawal conduct or obligations. (Operating Agreement § 9.1.) deemed to have withdrawn, and not whether withdrawal itself has been triggered.

Defendants argue that the LLC Act fills the gap to address any material subject

matter the parties have omitted, including the process following a member’s

withdrawal. After careful consideration, the Court agrees with Defendants.

48. To interpret LLC operating agreements, North Carolina courts employ

general rules of contract construction. See N.C. Gen. Stat. § 57D-2-30(e) (stating that

contract law “govern[s] the administration and enforcement of operating agreements”

except as otherwise provided in the LLC Act); N.C. State Bar v. Merrell, 243 N.C.

App. 356, 370, 777 S.E.2d 103, 114 (2015) (“An operating agreement is a contract.”).

Further, “[i]t is the policy of [the LLC Act] to give the maximum effect to the principle

of freedom of contract and the enforceability of operating agreements.” N.C. Gen.

Stat. § 57D-10-01. Thus, the LLC Act and the common law “will apply only to the

extent contrary or inconsistent provisions are not made in, or are not otherwise

supplanted, varied, disclaimed, or nullified by, the operating agreement.” Id. § 57D-

2-30(a).

49. “In a contract dispute between two parties, the trial court may interpret a

plain and unambiguous contract as a matter of law if there are no genuine issues of

material fact.” Premier, Inc. v. Peterson, 232 N.C. App. 601, 605, 755 S.E.2d 56, 59

(2014); see McKinnon v. CV Indus., Inc., 213 N.C. App. 328, 333, 713 S.E.2d 495, 500

(2011) (“Courts may enter summary judgment in contract disputes because they have

the power to interpret the terms of contracts.”). Moreover, “[p]arties can differ as to

the interpretation of language without its being ambiguous[.]” Walton v. City of Raleigh, 342 N.C. 879, 881–82, 467 S.E.2d 410, 412 (1996). “When an agreement is

ambiguous and the intention of the parties is unclear, however, interpretation of the

contract is for the jury.” Schenkel & Shultz, Inc. v. Hermon F. Fox & Assocs., P.C.,

362 N.C. 269, 273, 658 S.E.2d 918, 921 (2008).

50. When interpreting a contract, including an operating agreement, a trial

court seeks to determine “the intent of the parties when the contract was issued” by

deriving intent “from the language in the contract.” N.C. State Bar, 243 N.C. App. at

370, 777 S.E.2d at 114 (quoting Bank of Am., N.A. v. Rice, 230 N.C. App. 450, 455–

56, 750 S.E.2d 205, 209 (2013)). The language in a contract “should be given its

natural and ordinary meaning,” Southpark Mall Ltd. P’ship v. CLT Food Mgmt., 142

N.C. App. 675, 678, 544 S.E.2d 14, 16 (2001), as there is “a strong presumption in

favor of the correctness of the instrument as written and executed, for it must be

assumed that the parties knew what they agreed and have chosen fit and proper

words to express that agreement in its entirety,” Branch Banking & Tr. Co. v. Chicago

Title Ins. Co., 214 N.C. App. 459, 464, 714 S.E.2d 514, 518 (2011). In determining the

parties’ intent, a court must construe a contract “in a manner that gives effect to all

of its provisions, if the court is reasonably able to do so.” Johnston County v. R. N.

Rouse & Co., 331 N.C. 88, 94, 414 S.E.2d 30, 34 (1992). To that end, this Court has

observed that “courts have long used rules governing grammar as an aid to

interpreting statutes, contracts and other written instruments.” Novant Health, Inc.

v. Aetna U.S. Healthcare Carolinas, Inc., 2001 NCBC LEXIS 1, at *11 (N.C. Super.

Ct. Mar. 8, 2001). 51. Turning then to the language at issue, the second sentence of Section 8.10

is compound and contains two independent clauses—each of which may stand alone

as a distinct sentence—separated by the conjunction “and.” The first independent

clause sets forth the five events (i.e. subsections (a) (b), (c), (d), and (e)) that will cause

a member’s automatic withdrawal as a member of CDISE. The second independent

clause advises that the repercussions that follow from a member’s withdrawal are set

forth in Section 9.2. The first independent clause does not depend upon Section 9.2’s

existence and is not conditioned upon Section 9.2’s application. As a matter of

contract interpretation, therefore, the Court concludes that the omission of Section

9.2 from the Operating Agreement has no bearing on, and does not affect the validity

of, the first independent clause in Section 8.10. Therefore, the first independent

clause is enforceable as a standalone provision and, as applied here and without more,

will result in CDI’s deemed withdrawal. In these circumstances, the LLC Act will fill

the gap left by the omitted Section 9.2 and address the repercussions of a member’s

withdrawal.

52. Plaintiffs further contend, however, that even if CDI is deemed to have

withdrawn from CDISE by operation of Section 8.10, which the Court has now found,

Brown has, by his conduct, waived his right to enforce Section 8.10 without Plaintiffs’

consent. North Carolina law is clear that “provisions of a written contract may be

modified or waived by . . . conduct which naturally and justly leads the other party to

believe the provisions of the contract are modified or waived.” 42 E., LLC v. D.R.

Horton, Inc., 218 N.C. App. 503, 511, 722 S.E.2d 1, 6–7 (2012) (quoting Whitehurst v. FCX Fruit & Vegetable Serv., Inc., 224 N.C. 628, 636, 32 S.E.2d 34, 39 (1944)). Waiver

can occur even where the instrument expressly prohibits it. Id. at 511, 722 S.E.2d at

7. Although waiver is generally “a mixed question of law and fact, it is solely a

question of law when the facts are not in dispute.” Medearis v. Trs. of Meyers Park

Baptist Church, 148 N.C. App. 1, 11, 558 S.E.2d 199, 206 (2001).

53. “The essential elements of waiver are the existence at the time of the alleged

waiver of a right, advantage or benefit, the knowledge, actual or constructive, of the

existence thereof, and an intention to relinquish such right, advantage or benefit.”

J.W. Cross Indus. v. Warner Hardware Co., 94 N.C. App. 184, 186, 379 S.E.2d 649,

650 (1989). “The question of waiver is mainly one of intention, which lies at the

foundation of the doctrine.” Butler v. Charlotte-Mecklenburg Bd. of Educ., No.

COA11-1312, 2012 N.C. App. LEXIS 675, at *11 (N.C. Ct. App. June 5, 2012) (quoting

Danville Lumber & Mfg. Co. v. Gallivan Bldg. Co., 177 N.C. 103, 107, 97 S.E. 718,

720 (1919)).

54. Plaintiffs base their waiver argument on the fact that Brown continued to

negotiate with CDI over the purchase of CDI’s membership interest in CDISE for

more than a year after he learned of the New York Tax Warrants. Defendants

counter that no waiver can be found on those facts because the LLC Act provides that

after CDI’s automatic withdrawal, CDI maintained a fifty-percent economic interest in CDISE. Thus, Defendants argue, it was necessary for Brown to continue his

negotiations with CDI as he did.12

55. The parties’ conflicting positions have at their core whether Brown intended

to waive CDI’s deemed withdrawal from CDISE as he sought to negotiate the

purchase of CDI’s interest in CDISE. With evidence presented in support of both

sides’ contentions, the Court concludes that the matter is not susceptible to resolution

on summary judgment. See Estate of Hurst v. Jones, 230 N.C. App. 162, 170, 750

S.E.2d 14, 20 (2013) (“[I]ntent is an operation of the mind, it should be proven and

found as a fact, and is rarely to be inferred as a matter of law.”).

56. Accordingly, for the reasons set forth above, the Court concludes that issues

of material fact concerning whether Brown waived CDI’s deemed withdrawal from

CDISE preclude summary judgment on (i) Brown’s individual and derivative claims

for declaratory judgment; (ii) CDI’s derivative claims asserted on behalf of CDISE to

the extent Brown seeks dismissal based on CDI’s withdrawal from CDISE; and

(iii) CDI’s claims against Brown for breach of the Operating Agreement, breach of a

duty to negotiate in good faith, and breach of the covenant of good faith and fair

dealing to the extent Brown seeks dismissal based on CDI’s withdrawal from CDISE.

12 An economic interest owner “owns an economic interest but is not a member.” N.C. Gen. Stat. § 57D-1-03(11). An economic interest is the “proprietary interest of an interest owner in the capital, income, losses, credits, and other economic rights and interests of a limited liability company, including the right of the owner of the interest to receive distributions from the limited liability company.” Id. § 57D-1-03(10). The LLC Act provides that a “member” is “[a] person who has been admitted as a member of the LLC as provided in the operating agreement . . . until the person ceases to be a member as provided in the operating agreement[.]” Id. § 57D-1-03(21). 2. Misappropriation of Trade Secrets

57. Defendants next seek dismissal of Plaintiffs’ claims for misappropriation of

trade secrets. Plaintiffs allege that Defendants wrongfully misappropriated various

CDISE trade secrets for the use and benefit of Rove. Defendants contend that

Plaintiffs have failed to demonstrate the existence of protectable trade secrets, failed

to describe them with sufficient particularity, and failed to take reasonable steps to

protect their secrecy.

58. North Carolina’s Trade Secrets Protection Act (“NCTSPA”) provides that

the owner of a trade secret “shall have [ a] remedy by civil action for

misappropriation of his trade secret.” N.C. Gen. Stat. § 66-153. A trade secret is

defined under the NCTSPA as follows:

business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that:

a. Derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and

b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Id. § 66-152(3).

59. Generally, North Carolina courts consider the following six factors in

determining whether information constitutes a trade secret:

(1) [t]he extent to which information is known outside the business; (2) the extent to which it is known to employees and others involved in the business; (3) the extent of measures taken to guard secrecy of the information; [(4)] the value of information to business and its competitors; [(5)] the amount of effort or money expended in developing the information; and [(6)] the ease or difficulty with which the information could properly be acquired or duplicated by others.

Wilmington Star-News v. New Hanover Reg’l Med. Ctr., 125 N.C. App. 174, 180–81,

480 S.E.2d 53, 56 (1997). The Wilmington Star-News factors overlap, and courts

considering these factors do not always examine them separately and

individually. SCR-Tech LLC v. Evonik Energy Servs. LLC, 2011 NCBC LEXIS 27, at

*33–34 (N.C. Super. Ct. July 22, 2011).

60. A successful claim under the NCTSPA requires “a plaintiff [to] identify a

trade secret with sufficient particularity so as to enable a defendant to delineate that

which he is accused of misappropriating and a court to determine whether

misappropriation has or is threatened to occur.” Krawiec v. Manly, 370 N.C. 602,

609–10, 811 S.E.2d 542, 547–48 (2018) (quoting Washburn v. Yadkin Valley Bank &

Tr. Co., 190 N.C. App. 315, 326, 660 S.E.2d 577, 585 (2008)). Once a plaintiff has

demonstrated that he has a trade secret, he “must also identify the actual acts of

misappropriation with adequate specificity.” Safety Test & Equip. Co. v. Am. Safety

Util. Corp., 2015 NCBC LEXIS 40, at *28 (N.C. Super. Ct. Apr. 23, 2015). Actual or

threatened misappropriation may be established by the introduction of “substantial

evidence” that a person against whom relief is sought both “[k]nows or should have

known of the trade secret” and “[h]as had a specific opportunity to acquire it for

disclosure or use or has acquired, disclosed, or used it without the express or implied

consent or authority of the owner.” N.C. Gen. Stat. § 66-155. 61. A defendant may rebut an owner’s claim of misappropriation by proving that

the defendant acquired the trade secret information through independent

development or reverse engineering, that the information was received from another

person with a right to disclose the information, or that the information is generally

known in the industry. Id.; see also id. § 66-152(3)(a).

Sufficient Particularity

62. The Court first examines the threshold issue of whether Plaintiffs have

described their alleged trade secrets with sufficient particularity. See, e.g., Analog

Devices, Inc. v. Michalski, 157 N.C. App. 462, 468, 579 S.E.2d 449, 453 (2003).

63. Plaintiffs’ Complaint defined the scope of their trade secrets as follows:

[C]ustomer lists; the terms of CDI SE’s contracts with such customers; the information technology needs of each customer; the proprietary and unique solutions designed for each customer by CDI SE; the engineering drafts and plans made to create such solutions; the potential solutions and configurations that were considered but rejected as not meeting the needs of the customer; pricing information; purchasing information for the solutions implemented for each customer; company financial information, including sales and profit information; sales proposals and quotes for potential customers; and correspondence with potential customers regarding their information technology needs.

(Compl. ¶ 58.)

64. At this juncture, Plaintiffs broadly describe these trade secrets as falling

into one of six categories: (i) customer lists and customer opportunities (the

“Customer Lists and Opportunities”), (ii) SOWs, (iii) quotes (the “Quotes”), (iv) CDISE

financial information (the “CDISE Financial Information”), (v) employee information

(the “Employee Information”), and (vi) miscellaneous materials (the “Miscellaneous

Materials”). (Pls.’ Br. Opp’n Defs.’ Mot. Summ. J. 10–17, ECF No. 135.) Plaintiffs may satisfy their burden on Rule 56 by actually producing the information that is the

subject of their trade secrets claim. See Static Control Components, Inc. v. Darkprint

Imaging, Inc., 200 F. Supp. 2d 541, 545 (M.D.N.C. 2002) (“While categories alone

would not sufficiently support [plaintiff’s] claims, [plaintiff] has produced the actual

customer list and vendor information that it claims are trade secrets.” (citations

omitted)).

65. With the exception of the Miscellaneous Materials category, Plaintiffs have

presented evidence—in the form of documents, e-mails, affidavits, and deposition

testimony—identifying with particularity the information in each of the first five

categories they contend constitute trade secrets. Exemplar evidence can be found

throughout the record. (See, e.g., Bakker Aff. – Confidential Exs., at 119–28 (CDISE

customer opportunity list and work summaries); Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex.

65, at 138–40 (2016 Pipeline); Durham Aff. – Confidential Exs., at 77–101 (Ally SOW),

102–23 (AgFirst quote), 124–43 (Spring Global quotes), 144–48 (Park Sterling Bank

quote), 149–55 (Compass Group quote), 156–72 (Octopharma Plasma SOW), 189–202

(Sunbelt quotes), 203–41 (Medic SOWs and quotes), 242–48 (TradeKing quotes); Reid

Aff. ¶ 3 (describing Financial Information); Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 71, at

141–84 (Employee Earnings Record).) The Court concludes that Plaintiffs’

identification of these alleged trade secrets is sufficient to enable Defendants to

delineate that which they are accused of misappropriating and the Court to

determine whether misappropriation has occurred. Accordingly, the Court concludes

that Plaintiffs have identified the Customer Lists and Opportunities, SOWs, Quotes, CDISE Financial Information, and Employee Information (collectively, the

“Identifiable Trade Secrets”) with the particularity that our courts require and that

Defendants’ arguments to the contrary are misplaced.

66. The Court reaches a contrary conclusion, however, as to much of the alleged

trade secret information in the Miscellaneous Materials category. This category—

variously described as “proprietary and unique solutions,” “engineering drafts and

plans,” “potential solutions and configurations,” “correspondence with potential

customers,” and “information technology needs of each customer”—is broad, vague,

and has not been identified with sufficient particularity, or supported with record

evidence, to constitute a trade secret under North Carolina law. See Stephenson v.

Langdon, No. COA09-1494, 2010 N.C. App. LEXIS 1682, at *15 (N.C. Ct. App. Sept.

7, 2010) (finding that in the absence of identifiable evidence articulating the specific

information encompassed in the broadly defined categories of “customer lists, data,

and contract information, as well as client data and client contact computer

programs,” plaintiffs “failed to identify the trade secret ‘with sufficient particularity’”

to survive summary judgment).

67. While a plaintiff does not have to “define every minute detail of its trade

secrets down to the finest detail[,]” DSM Dyneema, LLC v. Thagard, 2014 NCBC

LEXIS 51, at *18 (N.C. Super. Ct. Oct. 17, 2014), Plaintiffs here have not provided

the sort of detail, or offered the sort of evidence, that enables Defendants to delineate

that which they allegedly misappropriated or the Court to determine whether trade

secret misappropriation occurred. As such, the Court concludes that Defendants’ Motion should be granted, with one exception, as to this remaining information. See

Panos v. Timco Engine Ctr., Inc., 197 N.C. App. 510, 519, 677 S.E.2d 868, 875 (2009)

(“Summary judgment should be granted upon the nonmovant’s failure to identify that

information which it claims to be a trade secret that was misappropriated.”).

68. The only information Plaintiffs identify with sufficient particularity among

the Miscellaneous Materials is CDISE’s “Quick Start” Manuals. Plaintiffs describe

the content of these manuals, explain their purpose, and have placed them in the

evidentiary record. (See Duignan Aff. ¶ 5, ECF No. 142; Attachs. Duignan Aff.

(Sealed), ECF No. 144.) The Court concludes that Plaintiffs have identified the Quick

Start Manuals with sufficient particularity to survive dismissal under Rule 56.13

Independent Actual or Commercial Value

69. To survive Defendants’ Motion, Plaintiffs must forecast evidence

demonstrating that the Identifiable Trade Secrets possess commercial value “from

not being generally known or readily ascertainable through independent

development or reverse engineering by persons who can obtain economic value from

its disclosure or use[.]” N.C. Gen. Stat. § 66-152(3); see Analog Devices, Inc., 157 N.C.

App. at 470, 579 S.E.2d at 454.

Customer Lists and Opportunities

70. Plaintiffs claim that the Customer Lists and Opportunities that CDISE has

amassed include some of their most sensitive trade secret information. Plaintiffs

have offered evidence showing that they developed and maintained detailed customer

13 Hereafter, the “Identifiable Trade Secrets” shall also include the Quick Start Manuals. contact information in their Connectwise software system since 2011. (CDI Dep. I,

at 150:10–155:2.) Plaintiffs have also tendered a CDISE “Pipeline” spreadsheet

document reflecting CDISE’s assessment of CDISE’s potential to do business with

specific customers, the vendors currently used by each customer, CDISE’s

“opportunity summary” for each customer, and other customer-specific information,

including closing data and gross and net revenue projections. (See Pls.’ Dep. Exs. Vol.

2 (Sealed), Ex. 65, at 138–40.)

71. Plaintiffs’ evidence suggests that the Customer Lists and Opportunities

information could not have been gathered or compiled without substantial time,

expense, and difficulty. See RoundPoint Mortg. Co. v. Florez, 2016 NCBC LEXIS 18,

at *32 (N.C. Super. Ct. Feb. 18, 2016) (“[W]hether a compilation or manipulation of

information deserves trade secret protection depends on several factors, including the

difficulty with which the information could be gathered, compiled, or manipulated.”).

Plaintiffs’ evidence further suggests that the Customer Lists and Opportunities have

independent actual or potential commercial value from not being generally known or

readily ascertainable to persons who can obtain economic value from its disclosure or

use. See Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C. App. 49,

56, 620 S.E.2d 222, 228 (2005) (concluding compilation of business information

including customer identity, customer-specific pricing, and historic customer demand

to constitute trade secrets); S. Fastening Sys. v. Grabber Constr. Prods., Inc., 2015

NCBC LEXIS 42, at *11, *13 (N.C. Super. Ct. April 28, 2015) (holding “confidential

customer information such as . . . customer buying preferences and history” constituted trade secrets). Accordingly, the Court concludes that Plaintiffs have met

their burden under Rule 56 as to these alleged trade secrets.

SOWs and Quotes

72. CDISE prepared SOWs for customers and potential customers to show the

services that CDISE might render in connection with any sale. CDISE provided

Quotes to its customers and potential customers that showed the prices of hardware

and materials. Defendants contend that Plaintiffs’ SOWs and Quotes are not trade

secrets under the Wilmington Star-News factors because their contents have little or

no commercial value and largely consist of information available in the public

domain.

73. North Carolina courts have found that the information found in SOWs and

quotes can constitute trade secrets. See, e.g., GE Betz, Inc. v. Conrad, 231 N.C. App.

214, 233–34, 752 S.E.2d 634, 649 (2013) (finding pricing information, customer

proposals, historical costs, and sales data to constitute trade secrets); Byrd’s Lawn &

Landscaping, Inc. v. Smith, 142 N.C. App. 371, 375–76, 542 S.E.2d 689, 692 (2001)

(finding historical cost information to be a trade secret). Ultimately, whether this

type of information constitutes a trade secret depends on the efforts the claimant has

undertaken to protect the information and whether the information would provide a

significant advantage to a competitor. Safety Test & Equip. Co., 2015 NCBC LEXIS

40, at *26–28. Although the inquiry is fact-specific and varies from case-to-case,

generally “where cost information remains confidential and derives commercial value from that confidentiality, it may constitute a trade secret.” Id. at *27 (citing GE Betz,

Inc., 231 N.C. App. at 234, 752 S.E.2d at 649).

74. The parties have submitted conflicting contentions and evidence as to the

confidential nature of the SOWs and Quotes and their potential to add value to

competitors. Defendants offer affidavit testimony suggesting that (i) SOWs would be

of no use to competitors because they are project specific, (ii) Quotes have a short

shelf-life due to regular price changes and are thus valueless, and (iii) customers

widely disseminated the information contained in Quotes and SOWs. (See 1st Brown

Aff. ¶¶ 94–95, 127.) In opposition, Plaintiffs offer (i) affidavit testimony indicating

that this information is highly proprietary, (see Bakker Aff. ¶ 10), (ii) exhibits

showing that SOWs and Quotes contained confidentiality language restricting

customers from disseminating the information, (see Pls.’ Dep. Exs. Vol. 2 (Sealed),

Exs. 28, 76; Pls.’ Dep. Exs. Vol. 3 (Sealed), Ex. 140; Durham Aff. – Confidential Exs.,

at 77–101, 102–23, 124–43, 144–48, 149–55, 156–72, 189–202, 203–41, 242–48), and

(iii) deposition testimony suggesting that many CDISE and Rove employees

considered this information to have commercial value to competitors, (see Pls.’ Dep.

Excerpts (Sealed), at 59; Brown Dep. I, at 209:16–19 (acknowledging that a VAR’s

pricing information “could be helpful” to a competitor)).

75. While stamping a document “confidential” does not make the information

contained therein a trade secret under the NCTSPA, Glaxo Inc. v. Novopharm Ltd.,

931 F. Supp. 1280, 1302 n.23 (E.D.N.C. 1996), the Court concludes that, based on the

facts of record here, there is a factual dispute as to whether the information contained in the SOWs and Quotes is sufficiently confidential and proprietary to constitute a

trade secret under North Carolina law,14 see Spirax Sarco, Inc. v. SSI Eng’g, Inc., 122

F. Supp. 3d 408, 426 (E.D.N.C. 2015) (finding customer quotes “that contain

confidential information regarding [plaintiffs’] customers’ desired products and

services and [plaintiffs’] prices and discounts for products and services” constituted

“plausible” trade secrets for purposes of a motion to dismiss); S. Fastening Sys., 2015

NCBC LEXIS 42, at *11 (noting that “confidential customer information such

as . . . customer buying preferences and history” may constitute trade secrets); Safety

Test & Equip. Co., 2015 NCBC LEXIS 40, at *31–32 (denying summary judgment

where there was contested evidence as to whether plaintiff’s compilation of historical

prices offered to customers constituted a trade secret); cf. Bldg. Ctr., Inc. v. Carter

Lumber of the N., Inc., 2017 NCBC LEXIS 85, at *24–25 (N.C. Super. Sept. 21, 2017)

(concluding price quotes were not trade secrets where quotes were not marked

confidential and plaintiff did not explain how quotes could be a trade secret).

CDISE’s Financial Information

76. CDISE’s Financial Information consists of CDISE’s financial history, profit

and loss information, revenues data, and information that can otherwise be found in

CDISE’s Quickbook files. In the Preliminary Injunction Order, the Court found that

Plaintiffs had shown a likelihood of success in establishing that this information

14 Defendants contend that CDISE’s Quotes and SOWs are available in the public domain and accessible through a simple Google search. At the March 1 hearing, however, Defendants’ counsel clarified that while many quotes and SOWs in the industry are available online, Defendants could not point to any CDISE Quotes or SOWs that were accessible through online searches. constitutes protectable trade secrets. See Computer Design & Integration, LLC v.

Brown, 2017 NCBC LEXIS 8, at *28 (N.C. Super. Ct. Jan. 27, 2017); see also Sunbelt

Rentals, Inc., 174 N.C. App. at 53–56, 620 S.E.2d at 226–28 (concluding compilation

of information, including budget and salary information, constituted a trade secret);

XPO Logistics, Inc. v. Anis, 2016 NCBC LEXIS 54, *20–21 (N.C. Super. Ct. July 12,

2016) (concluding “business and financial information” constituted trade secrets). It

appears that Defendants do not challenge the Court’s earlier conclusion. Indeed,

Keyser, a Rove employee, acknowledged that CDISE’s “financial information”

including “revenues and profit and loss and balance sheets” amounted to confidential

and proprietary information. (Pls.’ Dep. Excerpts (Sealed), at 61.) Viewing the

evidence in the light most favorable to Plaintiffs, the Court concludes that Plaintiffs

have offered sufficient evidence under Rule 56 to show that CDISE’s Financial

Information constitutes a trade secret.

Employee Information

77. Plaintiffs claim that Defendants misappropriated CDISE’s Employee

Information, which Brown used to hire CDISE’s employees based on the employment

terms they had with CDISE.

78. Employee information can constitute trade secrets under the NCTSPA. See

Med. Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 658–59, 670 S.E.2d 321,

328–29 (2009) (holding “[plaintiff’s] database, which contained [plaintiff’s employees’]

phone numbers, pay rates, specializations, and preferences regarding shifts and

facilities” constituted trade secrets); Sunbelt Rentals, Inc., 174 N.C. App. at 53–56, 620 S.E.2d at 226–28 (compilation of information, including personnel and salary

information and organizational structure, constituted trade secrets).

79. Plaintiffs present evidence that Keyser, through her Rove e-mail address,

received an e-mail with the attachment “rove – 13.pdf,” which is a spreadsheet labeled

“Employee Earnings Record.” (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 71, at 141–84.) The

Employee Earnings Record contains information concerning CDISE’s employees’

“hours, earnings, and reimbursements & other payments,” tax withholdings, and

employee benefit deductions for 2013. (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 71, at 142–

84.) It also includes employees’ addresses, the last four digits of their social security

numbers, birthdates, hire dates, pay frequencies, and the date of their last raises.

Plaintiffs have offered evidence that Brown used this information in making

employment offers to CDISE employees. (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 72, at

185; Pls.’ Dep. Excerpts (Sealed), 65–66.)

80. The Court concludes that a jury could reasonably find that the Employee

Earnings Record spreadsheet is a confidential “compilation of information” that

contains information of “potential commercial value from not being generally known

or readily ascertainable through independent development or reverse engineering.”

N.C. Gen. Stat. § 66-152. As such, Plaintiffs have made a sufficient showing that

CDISE’s Employee Information constitutes a protectable trade secret.

Quick Start Manuals

81. CDISE’s Quick Start Manuals are used by CDISE employees when

proposing a technical solution to a customer. Plaintiffs have offered evidence that the content of the Quick Start Manuals is derived from CDISE’s long experience in

implementing solutions to its customers’ complex problems. Defendants provide

evidence that similar manuals of competitors are publicly available, and that much

of CDISE’s Quick Start Manuals contain information found in those public manuals.

82. A compilation of information may constitute a trade secret where it has

“value as a compilation or manipulation of information, even if the underlying

information is otherwise publicly available.” RoundPoint Mortg. Co., 2016 NCBC

LEXIS 18, at *31–35 (holding plaintiff presented sufficient evidence that information

and processes were unique and provided commercial benefit where plaintiff “spent

much time and effort developing and customizing its information and processes”).

Here, Plaintiffs have presented affidavit testimony that the Quick Start Manuals

derive from CDISE’s years of experience in the industry, that the information

contained therein is unique and proprietary to CDISE, and that such information

would be valuable to competitors. (See Duignan Aff. ¶ 5.) Viewing the evidence in

the light most favorable to Plaintiffs, the Court concludes that Plaintiffs have offered

sufficient evidence to show that the Quick Start Manuals contain information

constituting protectable trade secrets.

Reasonable Efforts to Maintain Secrecy

83. Defendants further contend that they are entitled to summary judgment

because CDISE did not take reasonable steps to maintain the secrecy of any

information alleged to be trade secrets. 84. To receive trade secret protection, information must be “the subject of efforts

that are reasonable under the circumstances to maintain its secrecy.” N.C. Gen. Stat.

§ 66-152(3)(b). This inquiry is fact-specific, and “courts that have addressed it closely

examine the circumstances surrounding the trade secret to determine what measures

are reasonable.” Koch Measurement Devices, Inc. v. Armke, 2015 NCBC LEXIS 45,

at *15 (N.C. Super. Ct. May 1, 2015).

85. Plaintiffs have presented evidence that their employees’ computers were

password protected, that the CDISE handbook explicitly stated that “the protection

of confidential business information and trade secrets is vital to the interests and the

success of [CDISE],” (Exs. Reid Aff. 29), that some (but not all) employees signed

Confidentiality Agreements, that physical access on the CDISE premises was

restricted, and that much (but not all) of the information at issue was labeled

confidential or subjected to restricted use. Defendants counter with evidence that the

Confidentiality Agreements were not implemented until 2015, that many employees

did not receive, review, and sign the handbook, and that access to CDISE’s offices was

not restricted to outsiders. (See 1st Brown Aff. ¶¶ 90, 93.)

86. Defendants further contend that CDISE’s confidential information—and

specifically its Financial Information—lost trade secret protection because it was

shared with Brown and Brown’s representatives, including potential sources of

financing, during the due diligence period. The 2015 Term Sheet provided that

Brown and his representatives would have access to “books, records, properties and

assets of [CDISE] for purposes of conducting such investigations and inspections[.]” (2015 Term Sheet 5.) The 2015 Term Sheet also provided, however, that Brown and

his representatives would not “disclose or use to the detriment of CDI any

Confidential Information . . . except in connection with their evaluation of the

proposed transaction.” (2015 Term Sheet 5.) Further, the 2015 Term Sheet provided

that, upon CDI’s request, Brown and his representatives were required to promptly

return all confidential information, destroy all notes analyzing any such information,

and certify that they had done so. (2015 Term Sheet 5.)

87. The Court first concludes that CDISE’s alleged trade secrets did not lose

protection solely because they were shared with Brown and Brown’s potential

financers during the due diligence period. Cf. Area Landscaping, L.L.C. v. Glaxo-

Wellcome, Inc., 160 N.C. App. 520, 526, 586 S.E.2d 507, 512 (2003) (finding plaintiff

lost trade secret protection for bid information where plaintiff agreed that the bid

could be used and disclosed at defendant’s sole discretion); Safety Test & Equip. Co.,

2015 NCBC LEXIS 40, at *27 (“Where a plaintiff does not restrict a

customer’s . . . distribution of pricing information provided to the customer and

acknowledges the customer’s right to use that information, the pricing is not entitled

to trade secret protection.”). Indeed, trade secret information may be disclosed and

remain protected if the evidence shows a “clear focus on efforts a business took to

protect that information.” See Safety Test & Equip. Co., 2015 NCBC LEXIS 40, at

*26–27.

88. The critical question in deciding this issue on summary judgment is

“whether [Plaintiffs are] entitled to ask the jury to undertake an analysis of the reasonableness of [Plaintiffs’] efforts to maintain the confidentiality of the

information.” RoundPoint Mortg. Co., 2016 NCBC LEXIS 18, at *38. Although

Defendants have cast doubt on the adequacy of Plaintiffs’ efforts to maintain the

secrecy of their alleged trade secrets, viewing the evidence in the light most favorable

to Plaintiffs, the Court cannot conclude as a matter of law that Plaintiffs have failed

to adequately protect this information. See, e.g., id. at *37–38 (holding confidentiality

provision in handbook, password-protected computer systems, and employee

confidentiality agreements created issue of material fact as to whether plaintiff took

reasonable measures even where defendants “produced evidence that could lead a

jury to doubt the adequacy of [plaintiff’s] policies”); Koch Measurement Devices, Inc.,

2015 NCBC LEXIS 45, at *16 (declining to conclude as a matter of law that

reasonable measures were not taken where plaintiff kept files in a locked room and

used password-protected software); Safety Test & Equip. Co., 2015 NCBC LEXIS 40,

at *32–33 (finding jury must resolve contested facts regarding plaintiff’s efforts to

protect trade secrets despite defendants’ evidence); Sunbelt Rentals, Inc. v. Head &

Engquist Equip., L.L.C., 2003 NCBC LEXIS 6, at *78 (N.C. Super. Ct. May 2, 2003)

(finding reasonable efforts to maintain secrecy included “maintaining passwords on

the computer system, not giving each employee a password, shredding of confidential

documents, and requiring each employee to sign an employee handbook with a

confidentiality provision”). Actual or Threatened Misappropriation

89. “[O]nce a plaintiff has demonstrated that it has a trade secret, it must also

present ‘substantial evidence’ of misappropriation[.]” Safety Test & Equip. Co, 2015

NCBC LEXIS 40, at *28. The evidence must show that a defendant “(1) [k]nows or

should have known of the trade secret; and (2) [h]as had a specific opportunity to

acquire it for disclosure or use or has acquired, disclosed, or used it without the

express or implied consent or authority of the owner.” N.C. Gen. Stat. § 66-

155. Further, a plaintiff must identify the actual acts of misappropriation with

adequate specificity. See Washburn, 190 N.C. App. at 327, 660 S.E.2d at 586.

90. Plaintiffs have produced evidence tending to show that Rove employees e-

mailed each other attachments containing CDISE’s alleged trade secret information.

Specifically, the record demonstrates that Rove employees sent e-mails attaching the

“2016 Pipeline,” which contains information relating to Customer Lists and

Opportunities, and the “Employee Earnings Record,” which contains Employee

Information. The record further shows that Rove personnel stored a number of

CDISE alleged trade secret documents, including the Quick Start Manuals, SOWs,

and Quotes, into a cloud storage account called “withrove.box.com.” (See McCullough

Aff. ¶ 8, ECF No. 76; Bakker Aff. Exs., at 69; Durham Aff. – Confidential Exs., at

173–88, ECF No. 43.) The evidence also shows that Rove employees used CDISE

information to create SOWs for Rove by “cop[ying] the items from the CDI SOW into

the main sections” of the Rove SOW, and then sent those SOWs to potential

customers. (Pls.’ Dep. Exs. Vol. 2 (Sealed), Ex. 29, at 56–75; see Pls.’ Dep. Exs. Vol. 2 (Sealed), Exs. 28, 81, 97.) Plaintiffs have also presented evidence permitting a

factfinder to conclude that Rove subsequently obtained business from former CDISE

customers who received Rove SOWs which were created using CDISE information.

(See Confidential Exs. Durham Aff. (Sealed), at 79, 84, 125–26, 187, 199–203; Pls.’

Dep. Exs. Vol. 3 (Sealed), Exs. 104, 193, 194.)

91. Viewing this evidence in the light most favorable to Plaintiffs, the Court

concludes that Plaintiffs have offered substantial evidence of misappropriation

sufficient to reach a jury. See Sunbelt Rentals, Inc., 174 N.C. App. at 57–58, 620

S.E.2d at 229 (finding sufficient evidence of misappropriation of plaintiff’s customer

information where former employee used pricing information after she began work

with new company); Byrd’s Lawn & Landscaping, Inc., 142 N.C. App. at 376–77, 542

S.E.2d at 693 (holding “sufficient circumstantial evidence” of misappropriation

existed where former employee had access to pricing proposals through employment

with plaintiff, moved to another company, and caused customers to move their

business to new company); Safety Test & Equip. Co, 2015 NCBC LEXIS 40, at *40–

41 (concluding defendant’s e-mail, which indicated defendant used plaintiff’s

historical pricing information to outbid plaintiff shortly after two of plaintiff’s

employees joined defendant, was sufficient to create a material issue of fact as to

misappropriation); see also Red Valve, Inc. v. Titan Valve, Inc., 2018 NCBC LEXIS 31

(N.C. Super. Ct. Apr. 10, 2018) (finding sufficient evidence of actual or threatened

misappropriation under Rule 65 where former employees stored trade secret information from former employer in a Dropbox account before starting a competing

company).

92. In sum, the Court concludes that Plaintiffs have presented and forecasted

sufficient evidence showing that (i) Plaintiffs’ Identifiable Trade Secrets are

protectable under the NCTSPA, (ii) Plaintiffs have implemented reasonable

measures to maintain the secrecy of those Identifiable Trade Secrets, and

(iii) Defendants have engaged in specific acts of trade secret misappropriation. As

such, Plaintiffs have established a prima facie claim for misappropriation of trade

secrets.

93. The Court therefore denies Defendants’ Motion with respect to Plaintiffs’

trade secret claims concerning the Customer Lists and Opportunities, SOWs, Quotes,

CDISE Financial Information, Employee Information, and the Quick Start Manuals.

Defendants’ Motion is granted to the extent it seeks dismissal of Plaintiffs’ claims

arising out of the remaining Miscellaneous Materials.

3. Tortious Interference with Contract

94. Through their tortious interference with contract claim, Plaintiffs allege

that Defendants interfered with existing contracts between CDISE and (i) its

employees, including Defendant Jacoby, and (ii) its customers. Defendants contend

that Plaintiffs have not shown the existence of valid contracts and thus that the claim

should be dismissed as a matter of law.

95. In order to succeed on a claim for tortious interference with contract, a

plaintiff must show: (1) a valid contract between the plaintiff and a third person which confers upon the plaintiff a contractual right against a third person; (2) the defendant knows of the contract; (3) the defendant intentionally induces the third person not to perform the contract; (4) and in doing so acts without justification; (5) resulting in actual damage to plaintiff.

United Labs., Inc. v. Kuykendall, 322 N.C. 643, 661, 370 S.E.2d 375, 387 (1988).

96. Here, the allegations involving CDISE’s contract with its employees,

including Jacoby, are based on the Confidentiality Agreements certain CDISE

employees signed after their employment began. The evidence is clear that a number

of employees signed the Confidentiality Agreements, but Defendants contend that

the agreements are invalid for lack of consideration.

97. Every contract must be supported by consideration, and “[a] mere promise,

without more, is unenforceable.” Inv. Props. of Asheville, Inc. v. Norburn, 281 N.C.

191, 195, 188 S.E.2d 342, 345 (1972). Consideration consists of “any benefit, right, or

interest bestowed upon the promisor, or any forbearance, detriment, or loss

undertaken by the promisee.” Elliott v. Enka-Candler Fire & Rescue Dep’t, Inc., 213

N.C. App. 160, 163, 713 S.E.2d 132, 135 (2011).

98. Under North Carolina law, a “promise of continued at-will employment” is

inadequate consideration for a post-employment confidentiality agreement. Addison

Whitney, LLC v. Cashion, 2017 NCBC LEXIS 51, at *7–8 (N.C. Super. Ct. June 9,

2017). While the employment itself may serve as consideration when an employee

makes a promise as part of the initial employment terms, a later modification of the

employment contract must be supported by new consideration. Id. 99. Plaintiffs contend that consideration existed here because Jacoby and the

other employees signed the Confidentiality Agreements so that CDISE could pursue

larger accounts. The evidence shows that the larger customers requested that CDISE

employees sign the Agreements. An e-mail to CDISE employees reads:

Good news, we’re growing very rapidly and getting into some larger accounts. Those larger accounts are requiring that we have certain control instruments in place both from a confidentiality as well as a compliance standpoint. Please find attached required confidentiality agreement. I need this signed by each of you[.]

(Exs. Reid Aff. 7–8.)

100. The employees, however, were not offered any personal gain or benefit from

entering the Confidentiality Agreements. Even if the larger accounts permitted the

possibility of greater compensation to these employees as CDISE’s revenue increased,

a mere possibility of such a vague, future benefit does not constitute consideration

under North Carolina law. See, e.g., Milner Airco, Inc. v. Morris, 111 N.C. App. 866,

870, 433 S.E.2d 811, 814 (1993) (consideration consisting of a promise of promotion

when business improved is illusory and thus unenforceable); Amerigas Propane, L.P.

v. Coffey, 2015 NCBC LEXIS 98, at *17–18 (N.C. Super. Ct. Oct. 15, 2015) (holding

restrictive covenant was not supported by consideration because employee’s

eligibility for discretionary raise was illusory, and there was no evidence that pay

increases were directly related to execution of covenant). Because Plaintiffs have not

offered any evidence of consideration to support the Confidentiality Agreements, the

Court concludes that the Confidentiality Agreements are invalid and thus that Plaintiffs’ claim for tortious interference with the Confidentiality Agreements should

be dismissed.

101. Plaintiffs also assert a tortious interference of contract claim based on

Defendants’ alleged interference with CDISE’s customer contracts. Plaintiffs,

however, have not provided evidence of existing contractual agreements with

customers, and deposition testimony demonstrates that customers were free to

engage CDISE or other vendors at their sole election at any time. While Plaintiffs

have produced evidence that customers doing business with CDISE began doing

business with Rove, a mere expectation that customers would continue doing

business with CDISE, without more, does not create a contractual relationship with

which Defendants could tortiously interfere. See Beverage Sys. of the Carolinas, LLC

v. Associated Beverage Repair, LLC, 368 N.C. 693, 700–01, 784 S.E.2d 457, 462–63

(2016) (affirming grant of summary judgment on tortious interference with contract

claim where plaintiff could show only a general business relationship with customers

and not specific, valid contracts). The Court thus concludes that Defendants’ Motion

seeking dismissal of Plaintiffs’ claim for tortious interference with customer contracts

should be granted.

4. Tortious Interference with Prospective Economic Advantage

102. Through their tortious interference with prospective economic advantage

claim, Plaintiffs allege that Defendants intentionally and maliciously interfered with

CDISE’s prospective business relationships with various customers. 103. A claim for tortious interference with prospective economic advantage exists

“when a party interferes with a business relationship by maliciously inducing a

person not to enter into a contract with a third person, which he would have entered

into but for the interference, . . . if damage proximately ensues[.]” Id. at 701, 784

S.E.2d at 463 (quotation marks omitted). Thus, “a plaintiff must produce evidence

that a contract would have resulted but for a defendant’s malicious intervention.” Id.

Further, a “‘plaintiff’s mere expectation of a continuing business relationship is

insufficient’ to satisfy the ‘but for’ causation element of such a claim.” Hopkins v.

MWR Mgmt. Co., 2017 NCBC LEXIS 47, at *49 (N.C. Super. Ct. May 31, 2017)

(quoting Beverage Sys., 368 N.C. at 701, 784 S.E.2d at 463). A defendant’s actions

may be privileged, however, if the interference is for a legitimate business purpose.

Peoples Sec. Life Ins. Co. v. Hooks, 322 N.C. 216, 221, 367 S.E.2d 647, 650 (1988)

(holding that competition in business constitutes justifiable interference and is not

actionable where it is “carried on in furtherance of one’s own interests and by means

that are lawful”).

104. Plaintiffs offer evidence of three potential contractual relationships that

CDISE allegedly lost as a result of Defendants’ actions: Octapharma, Ally, and

Sunbelt Rentals. Defendants respond that the work Rove conducted for these three

customers was different from the work CDISE intended to perform for those

companies, and further, that CDISE’s potential projects with these accounts were not

specific and identifiable but rather uncertain. 105. Plaintiffs have offered evidence showing that CDISE maintained these three

accounts in their business pipeline and that the work Rove obtained from these

accounts was the same work that CDISE had been performing. (See Confidential

Exs. Durham Aff. (Sealed), at 187, 199–200, ECF No. 148; Pls.’ Dep. Exs. Vol. 3

(Sealed), Exs. 104, 193, 194.) Plaintiffs’ evidence also tends to show that Rove

employees, in securing these accounts’ business, represented that Rove’s buyout of

CDISE was complete, that CDISE was being liquidated, and that Rove was formerly

CDISE, none of which was true after negotiations fell apart. (See Pls.’ Dep. Exs. Vol.

1 Ex. 93; Exs. Durham Aff. at 6.)

106. Defendants contend that their conduct was privileged because it was in

furtherance of Rove’s legitimate business interests and thus justified. Peoples Sec.

Life Ins. Co., 322 N.C. at 220, 367 S.E.2d at 650. However, “[j]ustified

interference . . . ‘is lost if exercised for a wrong purpose . . . where the act is done

other than as a reasonable and bona fide attempt to protect the interest of the

defendant which is involved.’” Hopkins, 2017 NCBC LEXIS 47, at *51 (quoting

Peoples Sec. Life Ins. Co., 322 N.C. at 220, 367 S.E.2d at 650). The difference between

justified and unjustified interference turns on the presence of legal malice, or “the

intentional doing of the harmful act without legal justification.” Lenders Funding,

LLC v. WAIM Mgmt. Co., 2018 NCBC LEXIS 67, at *8 (N.C. Super. Ct. July 6, 2018)

(citing Childress v. Abeles, 240 N.C. 667, 675, 84 S.E.2d 176, 182 (1954)); see Pack

Bros. Body Shop v. Nationwide Mut. Ins. Co., 2003 NCBC LEXIS 2, at *32 (N.C.

Super. Ct. Jan. 10, 2003) (“The word ‘malicious’ used in referring to malicious interference with formation of a contract does not import ill will, but refers to an

interference with design of injury to plaintiffs or gaining some advantage at

[plaintiffs’] expense.” (quoting Walker v. Sloan, 137 N.C. App. 387, 393, 529 S.E.2d

236, 241–42 (2000))). Thus, whether Defendants’ conduct here was privileged

depends upon whether Defendants acted “by means that are lawful,” and “the

circumstances surrounding the interference, [Defendants’] motive or conduct, the

interests sought to be advanced, the social interest in protecting the freedom of action

of [Defendants] and the contractual interests of [Plaintiffs].” Peoples Sec. Life Ins.

Co., 322 N.C. at 221, 367 S.E.2d at 650.

107. The Court concludes that Defendants’ alleged conduct—securing work for

Rove at CDISE’s expense by using CDISE’s resources while Brown and Jacoby were

still employed at CDISE and falsely representing that CDISE was going out of

business to advance Rove’s business interests—is the sort of conduct that constitutes

legal malice under North Carolina law. See Addison Whitney, LLC v. Cashion, 2017

NCBC LEXIS 111, at *20–21 (N.C. Super. Ct. Dec. 1, 2017) (allowing counterclaim

for tortious interference with prospective economic advantage to proceed where

defendants alleged that plaintiff’s defamatory statements to third parties caused

third parties to not do business with defendants); cf. Beverage Sys., 368 N.C. at 700,

784 S.E.2d at 462 (noting that interference with a contract is “justified if it is

motivated by a legitimate business purpose, as when the plaintiff and the defendant,

an outsider, are competitors”). 108. Accordingly, the Court concludes that Defendants’ Motion should be denied

to the extent it seeks dismissal of Plaintiffs’ claim for tortious interference with

prospective economic advantage as to CDISE’s prospective work for Octapharma,

Ally, and Sunbelt Rentals. However, Defendants’ Motion shall be granted as to other

unidentified prospective accounts.

5. Breach of Confidentiality Agreement

109. Plaintiffs claim that Jacoby breached his Confidentiality Agreement by

misappropriating confidential information and making use of that information to

CDISE’s detriment. As discussed above, the Court has concluded that the

Confidentiality Agreement was not supported by consideration, and thus, is

unenforceable. Accordingly, Plaintiffs’ claim against Jacoby for breach of the

Confidentiality Agreement must necessarily be dismissed. See RoundPoint Mortg.

Co., 2016 NCBC LEXIS 18, at *50–51 (granting summary judgment and dismissing

claim for breach of a confidentiality agreement against former employees who signed

agreement after they began employment and no other consideration was given).

6. Failure to Negotiate in Good Faith

110. Plaintiffs allege that Brown had a duty to continue good faith negotiations

with CDI until he acquired CDISE. Plaintiffs contend that Brown breached this duty

by continuing to extend the closing date with no intention of completing the

transaction and by using the extension to recruit employees, develop a plan to

compete with CDISE, and establish Rove as a competing company. 111. Defendants challenge this claim by arguing that the parties did not enter

into a binding agreement of any sort, citing for support this Court’s holding in Insight

Health Corp. v. Marquis Diagnostic Imaging of N.C., LLC, 2016 NCBC LEXIS 77

(N.C. Super. Ct. Oct. 7, 2016). Plaintiffs respond by arguing that the parties had a

long, unique relationship and had agreed on most of the material terms of the

intended transaction.

112. The parties do not dispute the facts surrounding the Term Sheets or the

negotiations―only whether those facts support a valid claim for failure to negotiate

in good faith. The issue therefore is ripe for judicial determination at summary

judgment. The Court agrees with Defendants and concludes that the parties did not

enter a binding agreement to negotiate in good faith and thus that Brown did not owe

Plaintiffs any such duty.

113. In Insight Health Corp., this Court held that “an agreement to continue to

negotiate in good faith could be enforceable ‘provided that it me[ets] all of the

requirements for contract formation under North Carolina law[.]’” Insight Health

Corp., 2016 NCBC LEXIS 77, at *8 (quoting RREF BB Acquisitions, LLC v. MAS

Props., L.L.C., 2015 NCBC LEXIS 61, at *57 (N.C. Super. Ct. June 9, 2015)).

However, a duty to negotiate in good faith, and thus a successful claim for failure to

negotiate in good faith, typically may not be premised on a non-binding letter of

intent. Id. at *11 (noting that letters of intent are generally found to be unenforceable

“agreements to agree”); see Remi Holdings, LLC v. IX WR 3023 HSBC Way L.P., 2016

NCBC LEXIS 110, at *17–18 (N.C. Super. Ct. Dec. 12, 2016) (concluding a provision in a non-binding letter of intent that represented parties would act in “good faith and

good will” did not create a binding agreement to negotiate in good faith); JDH Capital,

LLC, 2009 NCBC LEXIS 8, at *15–16, *22 (holding letter of intent that provided it

was non-binding, contemplated future agreements, and left material terms undecided

was unenforceable).

114. Neither Term Sheet here reflected an agreement that the parties would

continue to negotiate in good faith in an effort to complete the transaction. Indeed,

the Term Sheets do not contain any provision discussing the conduct of future

negotiations or either party’s obligations in pursuit of the contemplated transaction.

Thus, as in Insight Health Corp., the express and unambiguous language of the

Terms Sheets “makes plain that there was no binding agreement [under the Term

Sheets] to continue negotiations at the time of the alleged breach.” Insight Health

Corp., 2016 NCBC LEXIS 77, at *11.

115. Moreover, the Term Sheets signed by CDI and Brown—each labeled a

“Letter of Intent”—expressly provide that:

[T]his is a NON-BINDING term sheet and is not intended to, and will not, create any obligation on any party hereto to consummate the transaction contemplated by this term sheet; it being acknowledged that any such obligation will only arise upon the parties’ execution of a Purchase Agreement and other mutually acceptable agreements.

(2015 Term Sheet 6–7; 2016 Term Sheet 8.) Each Term Sheet also provides that it

“may be terminated at any time, and for any or no reason, by either party by giving

written notice to the other party.” (2015 Term Sheet 6; 2016 Term Sheet 7.) Indeed,

the Term Sheets expressly provide that the final purchase was conditioned on Brown’s “satisfaction” during due diligence. (2015 Term Sheet 4; 2016 Term Sheet

5.) Such language emphasizing the nonbinding nature of the Term Sheets and the

absence of any contract language requiring good faith negotiation further

demonstrates that the parties did not make a binding agreement to negotiate in good

faith. See Remi Holdings, LLC, 2016 NCBC LEXIS 110, at *19 (“[H]aving concluded

that the Letter of Intent expresses the desires of the parties but not the agreement of

both, it would be illogical to conclude that a perfunctory reference to the parties’ good

faith in that same Letter of Intent creates a binding agreement.” (citation and

quotation marks omitted)).

116. Contrary to Plaintiffs’ contention, the fact that the Term Sheets identify

certain terms as “BINDING,” including provisions addressing “Confidentiality,”

“Non-Disclosure,” and “Access to Information,” (2015 Term Sheet 4–7; 2016 Term

Sheet 5–8), does not change this result. These provisions only address certain

obligations that will arise from any negotiations that may occur. They do not create

a binding obligation to negotiate in the first place. See Remi Holdings, LLC, 2016

NCBC LEXIS 110, at *17–19 (“The Court is not persuaded that [a] representation of

the parties’ good faith and good will [in an expressly non-binding letter of intent]

creates a binding agreement to negotiate in good faith.”); Insight Health Corp., 2016

NCBC LEXIS 77, at *15–16 (finding that a confidentiality clause, a clause requiring

compliance with due diligence, and a description of the letter of intent as an

“agreement” did not render letter of intent an enforceable agreement to negotiate in

the future). 117. Accordingly, the Court concludes that Defendants’ Motion should be granted

dismissing Plaintiffs’ claim against Brown for failure to negotiate in good faith.

7. Conversion

118. Plaintiffs claim that Defendants converted CDISE’s assets, including

(i) equipment owned by SunBelt Rentals that was in CDISE’s possession (the

“Sunbelt Equipment”); (ii) certain computer hardware, including a Cisco server,

Meraki security gear, and Data Domain equipment, (the “Computer Hardware”), and

(iii) business records in both tangible and electronic forms (the “Business Records”).

Defendants argue that these claims should be dismissed because Plaintiffs (i) did not

own the Sunbelt Equipment, (ii) suffered “no harm” when Defendants “inadvertently”

removed the Computer Hardware, (iii) have produced no evidence that Defendants

removed tangible Business Records from CDISE, and (iv) have “not shown any loss

of their use” of the electronic Business Records. (Defs.’ Br. Supp. Defs.’ Mot. Partial

Summ. J. 24, ECF No. 117; Defs.’ Reply Br. Supp. Defs.’ Mot. Partial Summ. J. 12–

13, ECF No. 170.1.)

119. Under North Carolina law, “[t]he tort of conversion is well defined ‘as an

unauthorized assumption and exercise of the right of ownership over goods or

personal chattels belonging to another, to the alteration of their condition or the

exclusion of an owner’s rights.’” Variety Wholesalers, Inc. v. Salem Logistics Traffic

Servs., LLC, 365 N.C. 520, 523, 723 S.E.2d 744, 747 (2012) (quoting Peed v.

Burleson’s, Inc., 244 N.C. 437, 439, 94 S.E.2d 351, 353 (1956)). The Court of Appeals

has emphasized that “[t]he essence of conversion is not the acquisition of property by the wrongdoer, but a wrongful deprivation of it to the owner[.]” Bartlett Milling Co.

v. Walnut Grove Auction & Realty Co., 192 N.C. App. 74, 86, 665 S.E.2d 478, 488

(2008) (quoting Lake Mary L.P. v. Johnston, 145 N.C. App. 525, 532, 551 S.E.2d 546,

552 (2001)). In short, “there is no conversion until some act is done which is a denial

or violation of the plaintiff’s dominion over or rights in the property.” Mace v. Pyatt,

203 N.C. App. 245, 256, 691 S.E.2d 81, 90 (2010) (quoting Lake Mary L.P., 145 N.C.

App. at 532, 551 S.E.2d at 552).

120. The undisputed facts of record show that Sunbelt Rentals owned the Sunbelt

Equipment that is partially the subject of Plaintiffs’ conversion claim. CDISE was in

possession of the equipment under a contract by which CDISE agreed to install the

equipment for Sunbelt Rentals. Because Plaintiffs did not own the Sunbelt

Equipment, it cannot properly be the subject of a conversion claim. See Bartlett

Milling Co., 192 N.C. App. at 86, 665 S.E.2d at 489 (finding that ownership by

plaintiff is an essential element necessary for conversion). Consequently, Plaintiffs’

claim for conversion of the Sunbelt Equipment should be dismissed.

121. As to Defendants’ alleged conversion of the Computer Hardware, the Court

concludes that Plaintiffs’ conversion claim should survive Defendants’ Motion.

Although Defendants argue that the Computer Hardware was inadvertently taken

and promptly returned upon request, and further that Plaintiffs suffered no harm by

the inadvertent taking, North Carolina law only “requires an ‘unauthorized’ taking

of property,” Cox v. Roach, 218 N.C. App. 311, 327, 723 S.E.2d 340, 351 (2012),

“regardless of the subsequent application of the converted property,” N.C. State Bar v. Gilbert, 189 N.C. App. 320, 324, 663 S.E.2d 1, 4 (2008); see Hawkins v. Hawkins,

101 N.C. App. 529, 533, 400 S.E.2d 472, 475 (1991) (noting that actual damage is not

an essential element of conversion), aff’d, 331 N.C. 743, 417 S.E.2d 447 (1992). As a

result, the Court concludes that Defendants’ Motion should be denied as to the alleged

conversion of the Computer Hardware.

122. Plaintiffs also claim that Defendants wrongfully converted certain tangible

and electronic Business Records. With respect to the tangible Business Records,

Plaintiffs allege that Defendants removed sensitive records, including customer

records, invoices, sales histories, sales forecasts, and employee records from locked

file drawers at CDISE. (Compl. ¶ 32.) Such records may be properly the subject of a

conversion claim. See Se. Shelter Corp. v. BTU, Inc., 154 N.C. App. 321, 331, 572

S.E.2d 200, 207 (2002) (holding “proprietary information, including customer lists,

contact lists, records and historical data” was the proper subject of a conversion

claim); Addison Whitney, LLC, 2017 NCBC LEXIS 51, at *16. Defendants argue that

Plaintiffs’ claim for conversion of this information should be dismissed because

Plaintiffs have failed to offer competent evidence that any tangible Business Records

were converted. The Court agrees.

123. The only evidence Plaintiffs offer that identifies the allegedly converted

tangible Business Records is found in their Verified Complaint. Although a “trial

court may not consider an unverified pleading when ruling on a motion for summary

judgment,” verified complaints may be treated as affidavits for that purpose. Rankin

v. Food Lion, 210 N.C. App. 213, 220, 706 S.E.2d 310, 315 (2011) (quoting Tew v. Brown, 135 N.C. App. 763, 767, 522 S.E.2d 127, 130 (1999)). Specifically, a court may

treat a verified complaint as an affidavit if it “(1) is made on personal knowledge,

(2) sets forth such facts as would be admissible in evidence, and (3) shows

affirmatively that the affiant is competent to testify to the matters stated therein.”

Page v. Sloan, 281 N.C. 697, 705, 190 S.E.2d 189, 194 (1972). In applying this test,

North Carolina courts have “repeatedly held that statements made upon information

and belief—or comparable language—do not comply with the personal knowledge

requirement[.]” Asheville Sports Props., LLC v. City of Asheville, 199 N.C. App. 341,

345, 683 S.E.2d 217, 220 (2009) (internal quotation marks omitted).

124. Here, the relevant allegation in Plaintiffs’ Verified Complaint is asserted

“[u]pon information and belief.” (See Compl. ¶ 32 (“Upon information and belief,

Defendants Brown and Jacoby also removed sensitive business records belonging to

CDISE, including customer records, invoices, sales histories, sales forecasts, and

employee records.”).) As such, the allegation is not based on Plaintiffs’ personal

knowledge, and the Court may not consider it in ruling on Defendants’ Motion.

Because Plaintiffs have failed to offer otherwise competent evidence in support of

their claim, Plaintiffs’ claim for conversion of tangible Business Records taken from

CDISE’s offices must be dismissed under Rule 56.

125. In contrast, however, Plaintiffs have presented evidence suggesting that

Defendants converted and deprived Plaintiffs of access to certain electronic Business

Records. While conversion may exist for the taking of electronic documents in

appropriate circumstances, see Addison Whitney, LLC, 2017 NCBC LEXIS 51, at *15– 16 (“The better view, and the weight of authority, treats electronic documents as

personal property subject to a claim for conversion.”),15 copying “electronically-stored

information[,] which does not deprive the plaintiff of possession or use of information,

does not support a claim for conversion,” id. at *17 (quoting RCJJ, LLC v. RCWIL

Enters., LLC, 2016 NCBC LEXIS 46, at *53 (N.C. Super. Ct. June 20, 2016)); see also

SQL Sentry, LLC v. ApexSQL, LLC, 2017 NCBC LEXIS 107, at *6 (N.C. Super. Ct.

Nov. 20, 2017) (dismissing conversion claim and noting “under North Carolina law,

allegations of mere copying of electronically stored information are insufficient to

state a claim for conversion”); RoundPoint Mortg. Co., 2016 NCBC LEXIS 18, at *55

(dismissing conversion claim where plaintiff did “not allege that Defendants copied

and then deleted the information so as to deprive [plaintiff] from its continued use of

the information”); Horner Int’l Co. v. McKoy, 2014 NCBC LEXIS 68, at *8 (N.C. Super.

Ct. Dec. 18, 2014) (dismissing conversion claim where plaintiff did “not allege it was

deprived of the information or excluded from use of the information allegedly

converted by Defendant”).

126. Plaintiffs contend that they were deprived of access to two sets of electronic

Business Records. First, Plaintiffs allege that one of the servers that Defendants

removed contained CDISE’s back-up records for its Syncplicity system. (See Duignan

Aff. ¶¶ 3–4.) CDISE used Syncplicity, a program similar to Dropbox but with local

file storage, to store and share project documents. According to Plaintiffs’ evidence,

15Federal courts in North Carolina take a different approach in their analysis of this issue. See Aym Techs. LLC v. Rodgers, 2018 NCBC LEXIS 14, at *43–44 (N.C. Super. Ct. Feb. 9, 2018) (noting the different approach taken in the federal district courts of North Carolina). CDISE was unable to access the information stored in Syncplicity until Defendants

returned the server to CDISE. (See Duignan Aff. ¶ 4.) Thus, there is evidence that

Defendants denied Plaintiffs access to these electronic Business Records by removing

the server that would have allowed Plaintiffs to access copies of those records. See

HCW Ret. & Fin. Servs., LLC v. HCW Emp. Benefit Servs., LLC, 2015 NCBC LEXIS

73, at *61–62 (N.C. Super. Ct. July 14, 2015) (concluding electronic information

stored in a database was subject to a conversion claim when defendant cut off

plaintiff’s ability to access). Viewing the evidence in the light most favorable to

Plaintiffs, the Court concludes that a genuine dispute of material fact exists as to

whether Plaintiffs were deprived of access to their electronic Business Records

contained on the server removed from CDISE. As a result, Defendants’ Motion

seeking dismissal of Plaintiffs’ claim for the alleged conversion of these electronic

Business Records must be denied.

127. Plaintiffs also claim that Defendants converted CDISE’s electronic Business

Records—specifically SOWs and Quotes—that were prepared using the Quotewerks

system. Plaintiffs have produced evidence showing that, while still working at

CDISE, Brown and other employees started using Quotewerks to prepare SOWs and

Quotes for CDISE customers in anticipation of their departure from CDISE. (Pls.’

Dep. Excerpts, at 8, 18, ECF No. 140; Pls.’ Dep. Excerpts (Sealed), 44–46, 55.)

128. During the transition period, the Quotewerks system pulled customer

information from CDISE’s comparable system, Connectwise. (Pls.’ Dep. Excerpts

(Sealed), 45–46.) At some point, Defendants noticed that the system wrote back the information contained in the SOWs and Quotes to CDISE’s Connectwise software

system. (Pls.’ Dep. Exs. Vol. 1, Ex. 22, 47.) Plaintiffs allege—and produce documents

showing—that Defendants broke the link to Connectwise, which prevented CDISE

from capturing any of the SOWs and Quotes that Brown and his team prepared while

they worked for CDISE—documents Plaintiffs contend were theirs. (Pls.’ Dep. Exs.

Vol. 1, Ex. 22, 47.)

129. Defendants argue that Plaintiffs cannot claim conversion of the Quotewerks

system because it was a system never used by CDISE; rather, it was only used in

anticipation of Defendants’ spinoff from CDISE. Defendants, however, misapprehend

Plaintiffs’ position. Plaintiffs do not claim they were deprived of the right to use

Quotewerks. Rather, Plaintiffs claim that Defendants used Quotewerks to deprive

CDISE from obtaining SOWs and Quotes that rightfully belonged to CDISE. As such,

Plaintiffs contend they have brought forward sufficient evidence that Defendants

converted these electronic records.

130. Viewing the evidence in the light most favorable to Plaintiffs, the Court

concludes that Plaintiffs have forecasted sufficient evidence that Defendants

interrupted CDISE’s link to the Connectwise system and thus deprived CDISE of

access to CDISE’s SOWs and Quotes to sustain Plaintiffs’ conversion claim under

Rule 56. See Gadson v. Toney, 69 N.C. App. 244, 246, 316 S.E.2d 320, 322 (1984)

(concluding summary judgment was improper where evidence did not establish

defendant’s legal right to plaintiff’s allegedly converted property as a matter of law). Plaintiffs’ Motion

1. Declaratory Judgment

131. Plaintiffs seek summary judgment on Brown’s individual and derivative

claims for declaratory judgment relating to CDI’s deemed withdrawal as a member

of CDISE under the Operating Agreement. For the reasons set forth in section

III(A)(1) above, Plaintiffs’ Motion must be denied.

2. Judicial Dissolution

132. Plaintiffs seek dismissal of Brown’s claim for judicial dissolution of CDISE,

which Brown asserts as an alternative to his declaratory judgment claims. Brown’s

claim for judicial dissolution posits that if CDI is not deemed withdrawn as a member

of CDISE, then he and CDI remain as CDISE’s only two members and that it is not

practicable for them to conduct CDISE’s business under the Operating Agreement.

Brown further claims that dissolution is necessary to protect his interest in CDISE,

citing CDISE’s recent financial setbacks as support. Through their Motion, Plaintiffs

contend that Brown has not proffered sufficient evidence to show that dissolution is

an appropriate remedy under the undisputed facts of record. The Court agrees with

Plaintiffs.

133. An LLC member may bring a claim for dissolution, and a court may dissolve

an LLC, where “it is established that (i) it is not practicable to conduct the LLC’s

business in conformance with the operating agreement and [the LLC Act] or

(ii) liquidation of the LLC is necessary to protect the rights and interests of the

member.” N.C. Gen. Stat. § 57D-6-02(02). Judicial “[d]issolution is an equitable remedy; therefore, before granting such a remedy, the Court ‘must exercise its

equitable discretion, and consider the actual benefit and injury to [all of] the

shareholders resulting from dissolution.’” Brady v. Van Vlaanderen, 2017 NCBC

LEXIS 61, at *24 (N.C. Super. Ct. July 19, 2017) (quoting Meiselman v. Meiselman,

309 N.C. 279, 297, 307 S.E.2d 551, 562 (1983)).16

134. The Court concludes, on the undisputed facts of record, that Brown has

failed to come forward with sufficient evidence to permit a factfinder to conclude that

dissolution is necessary to protect Brown’s interests or for the Court to determine

that dissolution is an appropriate equitable remedy. To the contrary, CDI is the

managing member of CDISE with “full, complete and exclusive authority, power and

discretion to direct, manage and control the business, affairs and assets of [CDISE],”

(Operating Agmt. § 6.1), and wishes to continue managing CDISE. To that end, CDI

has caused CDISE to hire a number of new employees since Brown’s departure and

CDISE continues to operate its business. Brown has not offered any evidence that

CDI has mismanaged CDISE, wasted its assets, or otherwise caused CDISE to suffer

financial loss through malfeasance or incompetence. Indeed, the undisputed evidence

shows that CDISE’s recent setbacks occurred after Brown went into competition with

CDISE through Rove, caused Rove to hire at least twenty-four CDISE employees, and

16 Meiselman involved the dissolution of a closely held corporation. See Meiselman, 309 N.C. at 297, 307 S.E.2d at 562. While the provisions in the General Statutes for dissolution of a closely held corporation and dissolution of an LLC are very similar, “North Carolina appellate courts have not yet addressed whether a claim pursuant to section 57D-6-02(2) is governed by the same principles as a Meiselman claim under Chapter 55.” Pure Body Studios Charlotte, LLC v. Crnalic, 2017 NCBC LEXIS 98, at *13 (N.C. Super. Ct. Oct. 18, 2017) (quoting Brady, 2017 NCBC LEXIS 61, at *31–32). caused Rove to obtain contracts with former CDISE customers, including

Octapharma, Ally, and Sunbelt. At most, Brown has shown that he and CDI have a

disagreement over Brown’s failed acquisition of CDISE, not that it is impracticable

for CDISE to continue conducting business in conformity with the Operating

Agreement and the LLC Act. Our courts have made clear that such a showing is

insufficient to sustain a dissolution claim. See, e.g., Brady, 2017 NCBC LEXIS 61, at

*31–33 (dismissing dissolution claim on summary judgment where plaintiff failed to

produce evidence supporting contention that LLC was mismanaged and its assets

wasted and observing that a “claim for judicial dissolution is not intended to police

disagreements among members that are not accompanied by proof of substantial

mismanagement or financial loss”); see also Dunbar Group, LLC v. Tignor, 593 S.E.2d

216, 218–19 (Va. 2004) (reversing order of dissolution where claimant alleged “serious

differences of opinion as to company management” and that company was deadlocked

even after expulsion of fifty-percent member).17

135. Nor has Brown offered evidence showing that liquidation is necessary to

protect his interest in CDISE. In particular, he has not offered any evidence that

CDI has violated his rights as an LLC member, operated CDISE in a manner

resulting in harm to his interest, or otherwise shown that any frustration of his

reasonable expectations as a CDISE member was because of actions other than his

own. The Court therefore concludes that Brown has not provided sufficient evidence

to show that judicial dissolution is necessary to protect his expectation or interest in

17Virginia’s dissolution statute is very similar to North Carolina’s. See Va. Code Ann. § 13.1- 1047. CDISE. See Meiselman, 309 N.C. at 301, 307 S.E.2d at 564 (noting that a plaintiff

seeking dissolution of a corporation must show that the frustration of plaintiff’s

reasonable expectations “was without fault of plaintiff and was in large part beyond

his control”); Royals v. Piedmont Elec. Repair Co., 137 N.C. App. 700, 708, 529 S.E.2d

515, 520 (2000) (noting that “there must be some causal connection between the

frustration of the shareholder’s reasonable expectations and his faulty behavior” in

order for fault to bar dissolution and that “a shareholder with an expectation in secure

employment would be barred from seeking dissolution if he embezzled money from

the company”).

136. For each of these reasons, the Court concludes that Brown’s claim for

judicial dissolution should be dismissed.

3. Fraud, Fraudulent Concealment, and Negligent Misrepresentation

137. Brown brings claims, in his individual capacity only, for fraud, fraudulent

concealment, and negligent misrepresentation against CDI, Reid, and Bakker for

allegedly preparing and providing false financial statements.18 Plaintiffs claim they

are entitled to summary judgment because Brown cannot show fraudulent intent,

reasonable reliance, or the existence of damages—necessary elements to one or more

of these claims.19

18 Although Plaintiffs contended that Brown’s fraud claim was partly based on a failure to pay certain guaranteed payments to Brown, Brown later clarified that “he is not basing his fraud claim on that conduct.” (Defs.’ Br. Opp’n Pls.’ Mot. Summ. J. 14 n.2, ECF No. 156.)

19 Plaintiffs also claim that the fraudulent concealment claim should not proceed because Brown has failed to show that he was owed any duty by those who allegedly committed the purported fraud. 138. To prevail on a claim for fraudulent misrepresentation or concealment, a

plaintiff must show “(1) [a] [f]alse representation or concealment of a material fact,

(2) reasonably calculated to deceive, (3) made with intent to deceive, (4) which does

in fact deceive, (5) resulting in damage to the injured party.” Forbis v. Neal, 361 N.C.

519, 526–27, 649 S.E.2d 382, 387 (2007). To establish a claim for negligent

misrepresentation, a party must show that he “(1) justifiably relies (2) to his

detriment (3) on information prepared without reasonable care (4) by one who owed

the relying party a duty of care.” Hospira Inc. v. AlphaGary Corp., 194 N.C. App.

695, 700, 671 S.E.2d 7, 12 (2009). The torts of fraudulent misrepresentation,

fraudulent concealment, and negligent misrepresentation each require a showing of

actual damages. See Forbis, 361 N.C. at 526–27, 649 S.E.2d at 387; Speller v. Speller,

273 N.C. 340, 343, 159 S.E.2d 894, 896 (1968) (“In order to establish fraud, there must

be a showing of actual loss, injury or damage.”); Hardin v. KCS Int’l., Inc., 199 N.C.

App. 687, 696, 682 S.E.2d 726, 733 (2009) (listing damages as an element of

fraudulent concealment); Piedmont Inst. of Pain Mgmt. v. Staton Found., 157 N.C.

App. 577, 589, 581 S.E.2d 68, 76 (2003) (noting that actual damages are an “essential

element” of negligent misrepresentation); Hawkins, 101 N.C. App. at 532–32, 400

S.E.2d at 474–75 (requiring actual damages for fraudulent misrepresentation).

139. Brown claims he “was damaged at least to the extent that CDISE had to pay

[an outside accounting firm] to fix the sales tax issue.” (Defs.’ Br. Opp’n Pls.’ Mot.

Summ. J. 22, ECF No. 156.) Thus, as framed by Brown, it is undisputed that any

damages arising out of CDISE’s tax delinquencies were incurred only by CDISE. Brown, however, has asserted his claims for fraud, fraudulent concealment, and

negligent misrepresentation in his individual capacity rather than as derivative

claims on behalf of CDISE, the allegedly damaged party. See Barger v. McCoy Hillard

& Parks, 346 N.C. 650, 658–59, 488 S.E.2d 215, 219 (1997) (noting that a shareholder

“may maintain an individual action against a third party for an injury that directly

affects the shareholder . . . [only] if the shareholder can show that the wrongdoer

owed him a special duty or that the injury suffered by the shareholder is separate

and distinct from the injury sustained by the other shareholders or the corporation

itself.”). Because Brown has not offered any evidence that CDI, Reid, or Bakker owed

him a special duty or that he has suffered a separate and distinct injury in connection

with these claims, Brown’s claims for fraud, fraudulent concealment, and negligent

misrepresentation should be dismissed. See id. at 659, 488 S.E.2d at 220 (“The only

injury plaintiffs as shareholders allege is the diminution or destruction of the value

of their shares as the result of defendants’ negligent or fraudulent misrepresentations

of TFH’s financial status. This is precisely the injury suffered by the corporation

itself.”). Moreover, it is undisputed that to the extent CDISE suffered injury due to

the conduct underlying these claims, those damages resulted from CDISE’s

nonpayment of taxes, not because of any negligent or fraudulent misrepresentation

or concealment to Brown.

140. Brown contends that these claims should proceed nonetheless because the

jury could award nominal damages on each, citing Silicon Knights, Inc. v. Epic

Games, Inc., No. 5:07-CV-275-D, 2012 U.S. Dist. LEXIS 63707 (E.D.N.C. May 7, 2012). Silicon Knights, however, held that a plaintiff must first establish the

complete cause of action before recovering nominal damages on any of these claims.

Id. at *26–27 (applying North Carolina law, which holds “once a cause of action is

established, a plaintiff is entitled to recover, as a matter of law, nominal damages.”

(quoting Hawkins v. Hawkins, 331 N.C. 743, 745, 417 S.E.2d 447, 449 (1992))). As

discussed above, fraud, fraudulent concealment, and negligent misrepresentation

each require actual damages as an element of the claim, and Brown has failed to offer

any such evidence.

141. Accordingly, for the reasons above, the Court concludes that Brown’s claims

for fraud, fraudulent concealment, and negligent misrepresentation should be

dismissed. In light of the Court’s resolution, the Court need not address Plaintiffs’

other arguments for dismissal of these claims.

4. Unfair and Deceptive Trade Practices

142. Plaintiffs next seek dismissal of Brown’s individual and derivative claims

against CDI, Reid, and Bakker for unfair or deceptive trade practices under the North

Carolina Unfair and Deceptive Trade Practices Act (the “UDTPA”), N.C. Gen. Stat.

§ 75-1.1. To succeed on a UDTPA claim, a plaintiff must prove “(1) an unfair or

deceptive act or practice, or an unfair method of competition, (2) in or affecting

commerce, (3) which proximately caused actual injury to the plaintiff or to his

business.” McLamb v. T.P. Inc., 173 N.C. App. 586, 593, 619 S.E.2d 577, 582

(2005) (quoting Spartan Leasing, Inc. v. Pollard, 101 N.C. App. 450, 460–61, 400

S.E.2d 476, 482 (1991)). “A practice is unfair if it is unethical or unscrupulous, and it is deceptive if it has a tendency to deceive.” Dalton v. Camp, 353 N.C. 647, 656,

548 S.E.2d 704, 711 (2001).

143. While the UDTPA broadly defines “commerce” to include “all business

activities, however denominated,” N.C. Gen. Stat. § 75-1.1(b), our courts have held

that the statute “is not intended to apply to all wrongs in a business setting,” HAJMM

Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 593, 403 S.E.2d 483, 492 (1991).

Particularly at issue here, “any unfair or deceptive conduct contained solely within a

single business is not covered by [the UDTPA].” White v. Thompson, 364 N.C. 47, 53,

691 S.E.2d 676, 680 (2010) (holding acts were not “in or affecting commerce” under

the UDTPA where defendant “unfairly and deceptively interacted only with his

partners, [and] his conduct occurred completely within the . . . partnership”); see

Wilson v. Blue Ridge Elec. Membership Corp., 157 N.C. App. 355, 358, 578 S.E.2d 692,

694 (2003) (“Matters of internal corporate management . . . do not affect commerce”

for purposes of section 75-1.1); Brewster v. Powell Bail Bonding, Inc., 2018 NCBC

LEXIS 76, at *17–18 (N.C. Super. Ct. July 26, 2018) (collecting cases and dismissing

section 75-1.1 claim premised on internal corporate dispute); Wheeler v. Wheeler, 2018

NCBC LEXIS 38, at *14 (N.C. Super. Ct. Apr. 25, 2018) (dismissing UDTPA claim in

“dispute between the shareholders of a corporation regarding its internal

management and the shareholders’ right to fair value for their ownership interest”

(emphasis added)).

144. Brown’s UDTPA claims here arise from his allegations that CDI, Reid (who

served as CDI’s CFO), and Bakker (who served as CDISE’s Vice President) provided false financial information for CDISE while Brown was negotiating the purchase of

CDI’s ownership interest.20 Because Brown’s UDTPA claims arise from acts related

to one member’s buyout of another member’s interest in an LLC, the Court concludes

that the claims arise from an internal dispute between business co-owners. As such,

the Court concludes that Brown cannot show that the acts underlying his section 75-

1.1 claim were “in or affecting commerce” as a matter of law. Brown’s UDTPA claim

therefore must be dismissed on this basis. Dalton, 353 N.C. at 657–58, 548 S.E.2d at

711 (affirming grant of summary judgment dismissing UDTPA claim where alleged

conduct and potential unfairness were confined within a single business); JS Real

Estate Invs. LLC v. Gee Real Estate, LLC, 2017 NCBC LEXIS 104, at *21 (N.C. Super.

Ct. Nov. 9, 2017) (granting summary judgment in dispute between LLC members);

Kingsdown, Inc. v. Hinshaw, 2015 NCBC LEXIS 30, at *28–29 (N.C. Super. Ct. March

25, 2015) (dismissing UDTPA claim which “plainly involve[d] internal business

disputes rather than interactions with businesses or consumers”); McKee v. James,

2014 NCBC LEXIS 74, at *42 (N.C. Super. Ct. Dec. 31, 2014) (granting summary

judgment where “the undisputed evidence of record d[id] not reveal a dispute between

[the company] and another business or consumers at large, but rather a dispute

between . . . co-owners”).

20 Brown’s allegations supporting his UDTPA claims are “substantially the same” as those supporting his fraud claim. (Defs.’ Br. Opp’n Pls.’ Mot. Summ. J. 22.) Indeed, “[p]roof of fraud would necessarily constitute a violation of the prohibition against unfair and deceptive acts[.]” Bhatti v. Buckland, 328 N.C. 240, 243, 400 S.E.2d 440, 442 (1991). The alleged fraudulent acts, however, must be “in or affecting commerce” to sustain a section 75-1.1 claim. Id.; see JS Real Estate Invs. LLC v. Gee Real Estate, LLC, 2017 NCBC LEXIS 104, at *20–21 (N.C. Super. Ct. Nov. 9, 2017). 145. In addition, the Supreme Court of North Carolina has also made clear that

“any unfair or deceptive practices occurring in the conduct of extraordinary events

of . . . a business will not give rise to a claim under the [UDTPA].” White, 364 N.C.

at 52, 691 S.E.2d at 679. In that regard, the Supreme Court has held that “‘[b]usiness

activities’ [under section 75-1.1] is a term which connotes the manner in which

businesses conduct their regular, day-to-day activities, or affairs, such as the

purchase and sale of goods, or whatever other activities the business regularly

engages in and for which it is organized.” HAJMM Co., 328 N.C. at 594, 403 S.E.2d

at 493; see, e.g., Tillery Envtl. LLC v. A&D Holdings, Inc., 2017 NCBC LEXIS 68, at

*14 (N.C. Super. Ct. Aug. 4, 2017) (dismissing UDTPA claim after concluding “that

the conduct underlying Plaintiff’s . . . claim constitute[d] an ‘extraordinary event’ tied

to the ‘change in ownership of the security [at issue]” (quoting HAJMM Co., 328 N.C.

at 594, 403 S.E.2d at 493)).

146. Brown bases his section 75-1.1 claim on the preparation and provision of

false financial statements in anticipation of Brown’s proposed acquisition of CDISE.

Such activities in connection with Brown’s contemplated acquisition, however, do not

“connote[] the manner in which businesses conduct their regular, day-to-day

activities, or affairs,” HAJMM, 328 N.C. at 594, 403 S.E.2d at 493. Rather, the

activities in furtherance of Brown’s proposed acquisition are part of an “extraordinary

event” that is beyond the reach of section 75-1.1. See, e.g., Latigo Invs. II, LLC v.

Waddell & Reed Fin., Inc., 2007 NCBC LEXIS 17, at *11–12 (N.C. Super. Ct. June

11, 2007) (applying HAJMM to dismiss section 75-1.1 claim where defendants reneged on agreement to purchase an ownership stake in plaintiff’s company).

Brown’s UDTPA claim must therefore be dismissed for this separate and independent

reason.

147. Finally, as an alternative factual basis for his UDTPA claims, Brown asserts

that CDI, Reid, and Bakker directed CDI’s Managed Services division to improperly

access the iCloud and iMessage accounts of former CDISE employees. Brown does

not allege or offer evidence, however, that his own accounts were accessed or that he

otherwise suffered injury from the conduct he alleges. The only injury he claims is to

other former CDISE employees, and Brown has offered no evidence to show that he

has standing to assert this claim on their behalf. See, e.g., Bruggeman, 165 N.C. App.

at 795, 600 S.E.2d at 511 (“Standing requires that the plaintiff have been injured or

threatened by injury or have a statutory right to institute an action[.]” (internal

quotation marks omitted). Because standing “is a necessary prerequisite to a court’s

proper exercise of subject matter jurisdiction[,]” Aubin v. Susi, 149 N.C. App. 320,

324, 560 S.E.2d 875, 878 (2002), and is a “question of law” for the court, McCrann,

225 N.C. App. at 372, 737 S.E.2d at 775, the Court concludes that Brown lacks

standing to assert his UDTPA claims based on allegedly improper access to former

CDISE employees’ iCloud or iMessage accounts. As such, Brown’s UDTPA claims

based on this alleged conduct should be dismissed for lack of subject matter

jurisdiction.

148. Moreover, even if Brown could overcome this jurisdictional hurdle, he fails

to offer any evidence to support his alternative factual contention, relying solely upon a counterclaim allegation made “[u]pon information and belief,” (Countercls. ¶ 90;

Am. Countercls. ¶ 168), that the Court may not consider on summary judgment, see

Asheville Sports Props., LLC, 199 N.C. App. at 345, 683 S.E.2d at 220 (finding

allegations made “upon information and belief” incompetent for summary judgment

purposes).

149. Accordingly, for each of the reasons set forth above, the Court concludes that

Brown’s individual and derivative claims against CDI, Reid, and Bakker under

Chapter 75 should be dismissed.21

5. Gross Mismanagement

150. Brown asserts a derivative claim on behalf of CDISE against CDI, Bakker,

Reid, Reid Accounting, “and/or” N&R for gross mismanagement, contending that

these parties failed to properly handle CDISE’s accounting, tax, and financial matters

and wasted CDISE’s assets. Plaintiffs contend that the claim as to Reid Accounting

and N&R22 should be dismissed because those two entities were never officers or

directors of CDISE, and did not owe a duty of care to CDISE on which a claim for

gross mismanagement may be based. The Court agrees.

151. Our courts have recognized that a claim for gross mismanagement against

a director of a corporation is a proper derivative claim. Green v. Condra, 2009 NCBC

LEXIS 20, at *30 (N.C. Super. Ct. Aug. 14, 2009) (citing Corp. Comm’n of N.C. v.

21 In light of the Court’s dismissal of Brown’s fraud claims, Brown’s unfair or deceptive trade practices claim must also be dismissed to the extent it is based on Brown’s individual fraud allegations.

22Plaintiffs did not seek summary judgment on Brown’s gross mismanagement claim against CDI, Bakker, and Reid. Merchants’ Bank & Tr. Co., 193 N.C. 113, 115, 136 S.E. 362, 363 (1927)). This right

of action has been codified in N.C. Gen. Stat. § 55-8-30(a), which outlines the general

standards for directors and provides a cause of action when a director violates his

statutory duty of care. Green, 2009 NCBC LEXIS 20, at *30 (citing N.C. Gen. Stat.

§ 55-8-30(a)(2)); see also N.C. Gen. Stat. § 55-8-42 (outlining standards of care for

officers and establishing a cause of action against officers). North Carolina courts

have not, however, recognized a claim for gross mismanagement against a person or

entity who is not a corporate officer or director. Even if our courts were to recognize

such a claim, Brown has failed to bring forward evidence showing that any of these

Third-Party Defendants owed him a fiduciary duty on which such a claim could be

based. Accordingly, Plaintiffs’ Motion is granted to the extent that it seeks dismissal

of Brown’s claim for gross mismanagement against Reid Accounting and N&R.

6. Professional Negligence

152. Brown asserts a derivative claim on behalf of CDISE against Reid, Reid

Accounting, and N&R for professional negligence, contending that these parties failed

to (i) remit sales and use tax reports and payments, (ii) provide accurate financial

reports, and (iii) keep true and accurate books and records. Plaintiffs contend that

the professional negligence claims should be dismissed because Brown has not

designated an expert to testify as to the applicable standard of care for each of these

allegedly negligent actions.

153. To establish professional negligence, “the plaintiff bears the burden of

showing: (1) the nature of the defendant’s profession; (2) the defendant’s duty to conform to a certain standard of conduct; and (3) a breach of the duty proximately

caused injury to the plaintiffs.” Frankenmuth Ins. v. City of Hickory, 235 N.C. App.

31, 35, 760 S.E.2d 98, 101 (2014) (quotation marks omitted). A claimant is required

to establish the standard of care for a professional negligence claim through expert

testimony “[w]here the common knowledge and experience of the jury is [not]

sufficient to evaluate compliance with a standard of care[.]” Id. (quoting Michael v.

Huffman Oil Co., 190 N.C. App. 256, 271, 661 S.E.2d 1, 11 (2008)). The “common

knowledge” exception to expert testimony in professional negligence cases “is

implicated where the conduct is gross, or of such a nature that the common knowledge

of lay persons is sufficient to find the standard of care required, a departure

therefrom, or proximate causation.” Handex of the Carolinas, Inc. v. County of

Haywood, 168 N.C. App. 1, 11, 607 S.E.2d 25, 31 (2005) (internal quotation marks

omitted). When a plaintiff fails to establish the proper standard of care through

expert testimony, summary judgment is appropriate. See id.

154. Brown contends that a jury’s common knowledge is sufficient to evaluate

the standard of care to be applied to each aspect of his professional negligence claim

and thus that expert testimony is not necessary to sustain his claim. North Carolina

courts have not addressed whether expert testimony is required for a professional

negligence claim against accountants, but other jurisdictions examining the issue

have found that expert testimony is generally required. See, e.g., Hassebrock v.

Bernhoft, 815 F.3d 334, 343 (7th Cir. 2016) (“[E]stablishing the duty of care for

accountants requires expert testimony.”); In re Puda Coal Sec., Inc., 30 F. Supp. 3d 230, 249 (S.D.N.Y. 2014) (“In accounting malpractice cases, in which a mere

negligence standard could be sufficient to establish liability, expert testimony is

typically required.”); Brown-Wilbert, Inc. v. Copeland Buhl & Co., 732 N.W.2d 209,

218 (Minn. 2007) (holding plaintiff asserting accounting malpractice claim must

present expert testimony identifying applicable standard of care and opining that

accountant deviated from that standard and that departure caused plaintiff’s

damages); Great S. Excavators, Inc. v. TEC Partners, LLP, 231 So. 3d 1011, 1014

(Miss. Ct. App. 2017); Buke, LLC v. Cross Country Auto Sales, LLC, 331 P.3d 942,

955 (N.M. Ct. App. 2014) (“[W]e hold that the same principles that govern the

necessity for expert testimony in other kinds of professional malpractice cases apply

to accountant malpractice cases.”); Gertler v. Sol Masch & Co., 835 N.Y.S.2d 178, 179

(App. Div. 2007).

155. Here, the Court concludes that expert testimony is necessary to support

some, but not all, of Brown’s professional negligence claims. First, with respect to

the claim that Reid, Reid Accounting, and N&R failed to timely report and remit sales

and use taxes, Brown argues that the jury will not need to evaluate the quality of

Reid’s, Reid Accounting’s, and N&R’s work, but solely whether each failed to remit

payment of CDISE’s sales and use tax obligations in North and South Carolina when

they were due. The Court agrees.

156. Beginning in 2011, CDISE was responsible for remitting sales and use taxes

and began collecting sales and use taxes from its customers. CDISE did not remit

sales and use taxes, however, until 2015. It is undisputed that CDISE had an obligation to remit sales and use taxes to North and South Carolina beginning in

2011. CDI, as Tax Matters Partner of CDISE, was responsible for overseeing CDISE’s

tax matters and engaged Reid as a consultant to handle such matters.23 Although

the “boundary line between [sales and use taxes] is narrow and oftentimes difficult

to trace with accuracy[,]” Johnston v. Gill, 224 N.C. 638, 643, 32 S.E.2d 30, 33 (1944),

a jury in this case will not be asked to determine whether sales and use taxes were

due or the basis for any tax assessments. Rather, the point Brown seeks to prove is

simply that a tax consultant handling a business entity’s tax matters should know

that admittedly owed sales and use taxes must be timely paid when due and that

failure to do so will cause the entity to incur interest and suffer late payment

penalties. The Court finds that such a proposition is within the common knowledge

of a typical juror and need not be established through expert testimony.

157. The Court finds unpersuasive Plaintiffs’ argument that an expert must offer

testimony as to how the sales and use taxes are to be filed for Brown’s professional

negligence claim to survive summary judgment. Just as a jury need not know how to

file a civil complaint to assess whether an attorney was negligent in failing to file

before the statute of limitations expired, see e.g., Little v. Matthewson, 114 N.C. App.

562, 568, 442 S.E.2d 567, 571 (1994) (“It does not require expert testimony to

establish the negligence of an attorney who is ignorant of the applicable statute of

23 The Operating Agreement specifically states that the Tax Matters Partner “shall oversee [CDISE’s] tax affairs in the overall best interests of [CDISE]” and represent CDISE “in connection with all examinations of [CDISE]’s affairs by tax authorities, including any resulting judicial and administrative proceedings, and . . . expend [CDISE] funds for professional services and costs associated therewith.” (Operating Agreement § 11.5.) limitations or who sits idly by and causes the client to lose the value of his claim for

relief.”), the mechanics of sales and use tax filing are not necessary to comprehend

whether a tax consultant handling a company’s tax matters should have filed sales

and use taxes when they came due.

158. In contrast, whether Reid, Reid Accounting, and N&R failed to provide

accurate financial statements and failed to maintain proper books and records cannot

proceed to the jury without expert testimony. Under the Operating Agreement,

CDISE’s books and records were to be maintained in accordance with the accrual

basis of accounting, (Operating Agreement § 11.2), a matter other courts have found

not within the common knowledge of laypersons, see Hassebrock v. Bernhoft, No. 10-

CV-0679-NJR-DGW, 2014 U.S. Dist. LEXIS 186759, at *16–17 (S.D. Ill. Aug. 25,

2014) (granting summary judgment on accounting malpractice claim based on

preparation of grossly inaccurate tax returns because plaintiff failed to offer expert

testimony); SEC v. Guenthner, 395 F. Supp. 2d 835, 846 (D. Neb. 2005) (“Establishing

that an accounting practice or method is inconsistent with GAAP requires expert

testimony.”); Seaward Int’l, Inc. v. Price Waterhouse, 391 S.E.2d 283, 287 (Va. 1990)

(“The definition of ‘generally accepted auditing standards,’ and the application of that

definition to the facts of a particular case, are matters beyond the common knowledge

of laymen.”). Similarly, the preparation of CDISE’s financial statements and the

evaluation of CDISE’s compliance with its financial reporting obligations are not

matters within the common knowledge of laypersons. Compare Frankenmuth Ins.,

235 N.C. App. at 36, 760 S.E.2d 98 at 102 (requiring expert testimony where “alleged wrongdoing of defendant . . . required the exercise of professional judgment regarding

a ‘reasonable’ level of water pressure in a municipal water system, the skill needed

to install a ‘loop’ system, and the expertise to install or recommend installing a

pressure-relieving device at the terminal ends of the system.”), and Delta Envtl.

Consultants of N. Carolina, Inc. v. Wysong & Miles Co., 132 N.C. App. 160, 168, 510

S.E.2d 690, 696 (1999) (expert testimony required for the standard of care utilized by

professional engineers in environmental cleanup), with Associated Indus.

Contractors, Inc. v. Fleming Eng’g, Inc., 162 N.C. App. 405, 411–12, 590 S.E.2d 866,

871 (2004) (within common knowledge exception where trier of fact could adequately

determine whether surveyor correctly measured ninety-degree angles in its design of

a rectangular building site).

159. Accordingly, the Court grants Plaintiffs’ Motion to the extent it seeks

dismissal of Brown’s claims against Reid, Reid Accounting, and N&R for professional

negligence based on their alleged failure to provide accurate financial reports and to

keep true and accurate books and records. The Court denies Plaintiffs’ Motion to the

extent it seeks dismissal of Brown’s claims for professional negligence based on Reid,

Reid Accounting, and N&R’s alleged failure to timely remit sales and use tax reports

and payments.

IV.

CONCLUSION

160. WHEREFORE, the Court, for the foregoing reasons, hereby ORDERS as

follows: a. Defendants’ Motion for Partial Summary Judgment is GRANTED in

part and DENIED in part as follows:

i. The Court DENIES Defendants’ Motion as to Brown’s individual

and derivative claims for declaratory judgment, and those claims

shall proceed to trial.

ii. The Court DENIES Defendants’ Motion as to CDI’s individual

and derivative claims to the extent Brown seeks dismissal of

those claims based on CDI’s withdrawal from CDISE.

iii. The Court DENIES Defendants’ Motion as to Plaintiffs’ claim

against Defendants for misappropriation of trade secrets to the

extent it relates to the Identifiable Trade Secrets, as defined

herein, and such claim shall go forward to trial. The Court

GRANTS Defendants’ Motion as to Plaintiffs’ claim against

Defendants for misappropriation of trade secrets to the extent it

relates to information that is not an Identifiable Trade Secret,

and dismisses that claim with prejudice.

iv. The Court GRANTS Defendants’ Motion as to Plaintiffs’ claim

against Defendants for tortious interference with contract, and

dismisses that claim with prejudice.

v. The Court DENIES Defendants’ Motion as to Plaintiffs’ claim

against Defendants for tortious interference with prospective

economic advantage with respect to CDISE’s prospective business with Octapharma, Ally, and Sunbelt Rentals and that claim shall

go forward to trial. The Court GRANTS Defendants’ Motion as

to Plaintiffs’ claim against Defendants for tortious interference

with prospective economic advantage to the extent the claim is

based on CDISE’s prospective business with any person or entity

other than Octapharma, Ally, or Sunbelt Rentals, and dismisses

that claim with prejudice.

vi. The Court GRANTS Defendants’ Motion as to Plaintiffs’ claim

against Jacoby for breach of the confidentiality agreement, and

vii. The Court GRANTS Defendants’ Motion as to Plaintiffs’ claim

against Brown for failure to negotiate in good faith, and dismisses

viii. The Court DENIES Defendants’ Motion as to Plaintiffs’ claim

against Defendants for conversion to the extent it relates to the

Computer Hardware and electronic Business Records, and those

claims shall go forward to trial. The Court GRANTS Defendants’

Motion as to Plaintiffs’ conversion claim against Defendants to

the extent it relates to Sunbelt Equipment and tangible Business

Records, and dismisses those claims with prejudice.

b. Plaintiffs’ Motion for Partial Summary Judgment is GRANTED IN

PART and DENIED IN PART as follows: i. The Court DENIES Plaintiffs’ Motion as to Brown’s individual

and derivative claims for declaratory judgment, and such claims

shall go forward to trial.

ii. The Court GRANTS Plaintiffs’ Motion as to Brown’s claim

against CDISE for judicial dissolution of CDISE, and dismisses

iii. The Court GRANTS Plaintiffs’ Motion as to Brown’s claims

against CDI, Reid, and Bakker for fraud, fraudulent concealment,

and negligent misrepresentation, and dismisses those claims with

prejudice.

iv. The Court GRANTS Plaintiffs’ Motion as to Brown’s individual

and derivative claims against CDI, Reid, and Bakker for unfair

and deceptive trade practices under section 75-1.1, and dismisses

those claims with prejudice.

v. The Court GRANTS Plaintiffs’ Motion as to Brown’s derivative

claim against Reid Accounting and N&R for gross

mismanagement, and dismisses that claim with prejudice.

vi. The Court DENIES Plaintiffs’ Motion as to Brown’s derivative

claim against Reid, Reid Accounting, and N&R for professional

negligence to the extent it relates to Reid, Reid Accounting, and

N&R’s alleged failure to remit sales and use tax reports and

payments, and that claim shall go forward to trial. The Court GRANTS Plaintiffs’ Motion as to Brown’s derivative claim

against Reid, Reid Accounting, and N&R for professional

negligence to the extent it relates to their alleged failure to

provide accurate financial reports and to keep true and accurate

books and records, and dismisses that claim with prejudice.

SO ORDERED, this the 10th day of December, 2018.24

/s/ Louis A. Bledsoe, III Louis A. Bledsoe, III Chief Business Court Judge

24 This Order and Opinion was originally filed under seal on December 10, 2018. This public version of the Order and Opinion is being filed on December 14, 2018. Because this public version of the Order and Opinion does not contain any substantive changes from the version filed under seal as to constitute an amendment, and to avoid confusion in the event of an appeal, the Court has elected to state the filing date of the public version of the Order and Opinion as December 10, 2018.