Strategic Mgmt. Decisions, LLC v. Sales Performance Int’l, LLC, 2017 NCBC 68.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 17 CVS 3061
STRATEGIC MANAGEMENT DECISIONS, LLC,
Plaintiff,
v.
SALES PERFORMANCE ORDER AND OPINION ON INTERNATIONAL, LLC; KEITH M. MOTION TO DISMISS EADES; DOUGLAS HANDY; AND ROBERT KEAR,
Defendants.
1. Plaintiff Strategic Management Decisions, LLC (“Plaintiff”) is one of two
members of Sales Talent Optimization, LLC (“STO”). Plaintiff contends that the
other member, Defendant Sales Performance International, LLC (“Sales
Performance”), wrongfully acquired the intellectual property of Plaintiff and STO,
used the intellectual property to usurp STO’s business opportunities, and competed
against Plaintiff and STO in violation of contractual and fiduciary duties. Plaintiff
further contends that three officers of Sales Performance—Keath Eades, Douglas
Handy, and Robert Kear (“Individual Defendants”)—are individually liable.
2. Defendants jointly moved to dismiss some, but not all, claims pursuant to
Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. They contend that this
is a simple contract dispute between two corporations, with no basis for additional
tort claims or individual liability. 3. Having considered the parties’ filings and arguments, the Court GRANTS
in part and DENIES in part the motion to dismiss.
Caudle & Spears, P.A. by Christopher P. Raab, and Martenson, Hasbrouck & Simon, LLP by Peter V. Hasbrouck and Christopher J. Perniciaro for Plaintiff.
Robinson, Bradshaw & Hinson, P.A. by Stephen M. Cox, Kevin R. Crandall, and Adam K. Doerr for Defendants.
Conrad, Judge. I. BACKGROUND
4. The Court does not make findings of fact on a Rule 12(b)(6) motion to
dismiss. The following factual summary is drawn from relevant allegations in the
complaint and the attached exhibits.
5. Plaintiff “is an employee survey, assessment, and analytics company.”
(Compl. ¶ 8.) Defendant Sales Performance is a company “engaged in sales
consulting.” (Compl. ¶ 9.)
6. The two companies jointly formed STO on March 10, 2014 for the purpose of
creating a “sales talent optimization technology platform.” (Compl. ¶ 17.) According
to the complaint, Plaintiff supplied the intellectual property needed to create the
platform, and Sales Performance agreed to use its expertise to sell the platform for
STO’s benefit. (Compl. ¶ 17; see also Compl. ¶ 19.) Plaintiff and Sales Performance
executed an Intellectual Property License and Services Agreement (“IP Agreement”)
“to govern the use and ownership of intellectual property” being contributed by each,
as well as intellectual property that would be jointly created through STO. (Compl.
¶ 18, Ex. 2 [“IP Agreement”].) 7. STO’s Operating Agreement governs the company’s membership and
management. (See Compl. Ex. 1 [“Operating Agreement”].) Sales Performance owns
a 60 percent membership interest in STO, and Plaintiff owns the remaining 40
percent. (See Operating Agreement p.A-1; see also Compl. ¶¶ 15–16.) Each member
has the power to designate one manager. (See Operating Agreement ¶ 5.3(a).) The
two managers, who must be individuals, together “have full, exclusive and complete
authority to manage the affairs of” STO, except for certain defined acts that require
unanimous member approval (such as voluntary dissolution, amendment of the
articles of organization, and conversion of the company into another form of business).
(Operating Agreement ¶ 5.1; see also Operating Agreement ¶ 6.3.)
8. STO was “immediately successful”—so successful that Sales Performance
sought to purchase Plaintiff’s interest in December 2014. (Compl. ¶¶ 20–21.)
Plaintiff obtained a valuation, but Sales Performance rejected it without explanation
and without making a counteroffer. (See Compl. ¶¶ 21–22.)
9. Plaintiff now characterizes the episode as “pretextual” and alleges that
Sales Performance has been competing against it and STO ever since. (Compl. ¶ 23.)
The complaint alleges that Sales Performance used the intellectual property supplied
by Plaintiff to “creat[e] a separate sales talent optimization technology platform” and
then usurped business opportunities that should have gone to STO. (Compl. ¶¶ 23–
25.) The net result, according to Plaintiff, is that Sales Performance “took” the
interest that it refused to buy. (Compl. ¶ 23.) 10. Plaintiff filed its complaint on January 14, 2017. It asserts five causes of
action: breach of the IP Agreement and breach of fiduciary duty as to Sales
Performance; and conversion, unfair or deceptive trade practices, and unjust
enrichment as to all Defendants. The complaint does not assert any derivative claims
on behalf of STO. (See Pl.’s Resp. to Defs.’ Mot. to Dismiss 2 n.1 [“Pl.’s Resp.”].)
11. On April 26, 2017, Defendants jointly moved to dismiss all claims except
breach of the IP Agreement. The motion is fully briefed, and the Court held a hearing
on July 25, 2017. The motion is ripe for determination.
II. ANALYSIS
12. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the
complaint.” Concrete Serv. Corp. v. Investors Grp., Inc., 79 N.C. App. 678, 681, 340
S.E.2d 755, 758 (1986). “Dismissal of a complaint under Rule 12(b)(6) is proper when
one of the following three conditions is satisfied: (1) when the complaint on its face
reveals that no law supports plaintiff’s claim; (2) when the complaint on its face
reveals the absence of fact sufficient to make a good claim; (3) when some fact
disclosed in the complaint necessarily defeats plaintiff’s claim.” Jackson v.
Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743, 745 (1986).
13. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded
allegations of the complaint as true and view the facts and permissible inferences “in
the light most favorable to” the non-moving party. Ford v. Peaches Entm’t Corp., 83
N.C. App. 155, 156, 349 S.E.2d 82, 83 (1986); see also Sutton v. Duke, 277 N.C. 94, 98,
176 S.E.2d 161, 163 (1970). “[T]he court is not required to accept as true any conclusions of law or unwarranted deductions of fact.” Oberlin Capital, L.P. v. Slavin,
147 N.C. App. 52, 56, 554 S.E.2d 840, 844 (2001). In addition, the Court “may
properly consider documents which are the subject of a plaintiff’s complaint and to
which the complaint specifically refers,” without converting a Rule 12(b)(6) motion
into a motion for summary judgment. Weaver v. St. Joseph of the Pines, Inc., 187 N.C.
App. 198, 204, 652 S.E.2d 701, 707 (2007) (quoting Oberlin Capital, 147 N.C. App. at
60, 554 S.E.2d at 847).
A. Conversion
14. Conversion is “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.’” Peed v. Burleson’s,
Inc., 244 N.C. 437, 439, 94 S.E.2d 351, 353 (1956) (citation omitted). “The 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).
15. Plaintiff’s conversion claim has evolved over time. The complaint broadly
alleges that Defendants converted Plaintiff’s “intellectual property, including but not
limited to [Plaintiff’s] assessment and analytics technology.” (Compl. ¶ 35.) In its
briefing, Plaintiff pares back the allegation, stating that the claim “is not for patent,
trademark, or copyright conversion” but is instead “correctly categorized as
conversion of ‘proprietary information.’” (Pl.’s Resp. 5.) At the hearing, Plaintiff
further clarified that the property at issue is primarily software. 16. The nature of the allegedly converted property is important because North
Carolina does not recognize a claim for conversion of intangible interests. See, e.g.,
Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d
248, 264 (2000) (citing “business opportunities and expectancy interests” as
“intangible interests”); HCW Ret. & Fin. Servs., LLC v. HCW Emp. Benefit Servs.,
LLC, 2015 NCBC LEXIS 73, at *57–58 (N.C. Super. Ct. July 14, 2015) (dismissing
conversion claim as to trademark rights). On the other hand, a conversion claim may
cover proprietary information in certain circumstances. See Se. Shelter Corp. v. BTU,
Inc., 154 N.C. App. 321, 331, 572 S.E.2d 200, 207 (2002).
17. For purposes of this motion, the Court liberally construes the complaint to
allege the conversion of “electronically stored proprietary information,” as Plaintiff’s
brief states. (Pl.’s Resp. 5.) Although the intellectual property identified in the IP
Agreement includes patents, copyrights, and trademarks, it also includes other
technology and products, which apparently comprise the relevant software. (See IP
Agreement pp.15–16; see also Pl.’s Resp. 5 (referring to certain “technology
platforms,” “assessments,” and “employee surveys”).) The Court further assumes,
without deciding, that this property could be the subject of a conversion claim.
18. Even so, Plaintiff has failed to allege that it was deprived of this
information. The complaint states only that the information was “copied, reproduced,
and disseminated to various third parties without [Plaintiff’s] authorization or
consent.” (Compl. ¶ 29.) Plaintiff’s sur-reply similarly states that its “allegations
encompass misappropriation of a physical copy” of electronically stored information. (Pl.’s Surreply 1.) As this Court has recently held, “making a copy of electronically-
stored information which does not deprive the plaintiff of possession or use of
information, does not support a claim for conversion.” RCJJ, LLC v. RCWIL Enters.,
LLC, 2016 NCBC LEXIS 46, at *53 (N.C. Super. Ct. June 20, 2016); see also Addison
Whitney, LLC v. Cashion, 2017 NCBC LEXIS 51, at *17 (N.C. Super. Ct. June 9,
2017); RoundPoint Mortg. Co. v. Florez, 2016 NCBC LEXIS 18, at *55 (N.C. Super.
Ct. Feb. 18, 2016); Horner Int’l Co. v. McKoy, 2014 NCBC LEXIS 68, at *8 (N.C.
Super. Ct. Dec. 18, 2014).
19. The Court therefore grants the motion to dismiss as to the claim for
conversion. The Court need not address Defendants’ alternative arguments,
including their argument that the claim is preempted by the federal Copyright Act.
B. Unfair or Deceptive Trade Practices
20. Plaintiff’s claim under N.C. Gen. Stat. § 75-1.1 is also the subject of some
ambiguity. The complaint restates all preceding paragraphs without identifying the
acts that are alleged to be unfair or deceptive trade practices. (See Compl. ¶¶ 48–51.)
At the hearing, Plaintiff’s counsel clarified that the claim is limited to Defendants’
alleged taking of Plaintiff’s technology and that it does not concern the alleged taking
of STO’s technology or usurpation of its business opportunities.
21. The clarification considerably narrows the issue. The alleged unfair trade
practices are essentially identical to the alleged conversion and breach of the IP
Agreement: that Sales Performance “copied, reproduced, and disseminated”
Plaintiff’s intellectual property and proprietary information. (Compl. ¶ 28.) Having already dismissed the conversion claim, the Court further agrees with Defendants
that “a mere breach of contract, even if intentional, is not sufficiently unfair or
deceptive to sustain an action under N.C.G.S. § 75-1.1.” Branch Banking & Trust Co.
v. Thompson, 107 N.C. App. 53, 62, 418 S.E.2d 694, 700 (1992).
22. Appellate precedent routinely holds that a section 75-1.1 violation “is
unlikely to occur during the course of contractual performance,” and “these types of
claims are best resolved by simply determining whether the parties properly fulfilled
their contractual duties.” Heron Bay Acquisition, LLC v. United Metal Finishing,
Inc., 781 S.E.2d 889, 893 (N.C. Ct. App. 2016) (quoting Mitchell v. Linville, 148 N.C.
App. 71, 75, 557 S.E.2d 620, 623–24 (2001)). Plaintiff has not alleged the type of
“substantial aggravating circumstances,” such as fraud, necessary to transform a
breach of contract into a section 75-1.1 claim. Branch Banking & Trust, 107 N.C.
App. at 62, 418 S.E.2d at 700. At most, Plaintiff’s allegation that Sales Performance
“purposefully” copied and disseminated its intellectual property would constitute an
intentional breach of the IP Agreement, which is insufficient to state a claim for
unfair or deceptive trade practices. (Compl. ¶ 29.)
23. Accordingly, the Court grants the motion to dismiss as to the claim for unfair
or deceptive trade practices.
C. Breach of Fiduciary Duty
24. Plaintiff alleges that Sales Performance, as the majority member of STO,
breached a fiduciary duty owed to Plaintiff, as the minority member. (See Compl.
¶ 41; see also Compl. ¶ 42.) Sales Performance contends that there is no fiduciary relationship between STO’s members and that, in any event, the parties waived and
disclaimed any fiduciary duties in the Operating Agreement. (See Mem. of Law in
Supp. of Defs.’ Mot. to Dismiss Claims Under Rule 12(b)(6) 8, 11 [“Defs.’ Br.”].)
25. The law does not favor claims by one LLC member against another for
breach of fiduciary duty. As the North Carolina Court of Appeals has explained, the
North Carolina Limited Liability Company Act “does not create fiduciary duties
among members.” Kaplan v. O.K. Techs., L.L.C., 196 N.C. App. 469, 473, 675 S.E.2d
133, 137 (2009). Rather, members of an LLC “are like shareholders in a corporation
in that members do not owe a fiduciary duty to each other or to the company.” Id.
26. Plaintiff relies on an exception to this general rule. Citing Kaplan, a few
recent cases have stated that “a holder of a majority interest who exercises control
over the LLC owes a fiduciary duty to minority interest members.” Fiske v. Kieffer,
2016 NCBC LEXIS 22, at *9 (N.C. Super. Ct. Mar. 9, 2016); see also Zagaroli v. Neill,
2016 NCBC LEXIS 106, at *18 (N.C. Super. Ct. Dec. 29, 2016); SCA-Blue Ridge, LLC
v. WakeMed, 2016 NCBC LEXIS 2, at *20 (N.C. Super. Ct. Jan. 4, 2016); Island
Beyond, LLC v. Prime Capital Grp., LLC, 2013 NCBC LEXIS 48, at *14–15 (N.C.
Super. Ct. Oct. 30, 2013).
27. The scope of this exception, borrowed from precedents governing
corporations, remains unsettled. This Court has cautioned against a broad
application because of the fundamental differences between LLCs and corporations.
See HCW Ret. & Fin. Servs., 2015 NCBC LEXIS 73, at *47 n.102; see also Blythe v.
Bell, 2013 NCBC LEXIS 17, at *13–14 (N.C. Super. Ct. Apr. 8, 2013). Unlike a corporation, “[a]n LLC is primarily a creature of contract.” Crouse v. Mineo, 189 N.C.
App. 232, 237, 658 S.E.2d 33, 36 (2008) (quoting Russell M. Robinson, II, Robinson
on North Carolina Corporate Law § 34.01, at 34-2 to 34-3 (rev. 7th ed. 2016)). The
rights and duties of LLC members are ordinarily governed by the company’s
operating agreement, not by general principles of fiduciary relationships. See N.C.
Gen. Stat. § 57D-2-30 (“The operating agreement governs the internal affairs of an
LLC and the rights, duties, and obligations of . . . the interest owners . . . in relation
to each other”). Especially where the members have bargained for comprehensive
terms to govern their relationship, the imprudent imposition of fiduciary duties could
“undermine the contractual nature of an Operating Agreement.” HCW Ret. & Fin.
Servs., 2015 NCBC LEXIS 73, at *47 n.102.
28. With these principles in mind, the Court concludes that Plaintiff has not
adequately alleged the existence of a fiduciary relationship. Plaintiff first contends
that Sales Performance’s “mere possession of a majority interest in STO created a
fiduciary relationship with [Plaintiff] as a minority interest holder.” (Pl.’s Br. 11.)
That is simply wrong. Even in the context of corporate shareholders, “the element of
control is what gives rise to a fiduciary duty between the controlling shareholder and
the minority.” Emergys Corp. v. Consert, Inc., 2012 NCBC LEXIS 19, at *21 (N.C.
Super. Ct. Apr. 5, 2012) (emphasis added); see also Gaines v. Long Mfg. Co., 234 N.C.
340, 344–45, 67 S.E.2d 350, 353 (1951) (stating “the fact of control . . . creates the
fiduciary obligation on the part of the majority stockholders”); Freese v. Smith, 110 N.C. App. 28, 37, 428 S.E.2d 841, 847 (1993) (“In North Carolina, it is well established
that a controlling shareholder owes a fiduciary duty to minority shareholders.”).
29. Plaintiff insists that a majority interest “creates a presumption of a control
that cannot be overcome by only considering the pleadings.” (Pl.’s Br. 11.) That may
be true for corporations. See Corwin v. British Am. Tobacco PLC, 796 S.E.2d 324, 332
(N.C. Ct. App. 2016) (“[A] majority shareholder is presumed to be a controlling
shareholder.” (internal quotation omitted)), review allowed 799 S.E.2d 616 (N.C.
2017). Plaintiff has neither cited authority extending the rule to LLCs nor explained
why it would be sensible to do so. There is little reason to believe that control
presumptively goes hand in hand with a majority interest in an LLC. “Parties to an
LLC Operating Agreement can alter statutory default rules,” Island Beyond, 2013
NCBC LEXIS 48, at *15, and minority members of an LLC have “the freedom of
contract . . . to obtain minority protections not available to shareholders of [a] closely-
held corporation,” Blythe, 2013 NCBC LEXIS 17, at *14.
30. The STO Operating Agreement is a case in point. It conclusively rebuts any
presumption of majority control, to the extent one exists. Although Sales
Performance owns 60 percent of STO, it has no meaningful ability to use that interest
to exercise control over the company. Plaintiff and Sales Performance are not “agents
of” STO and do “not have any authority to manage or control the business and affairs
of the Company or to sign for or act on behalf of the Company.” (Operating Agreement
§ 6.1.) The Operating Agreement instead vests “full, exclusive and complete
authority to manage the affairs of the Company” in two managers. (Operating Agreement § 5.1.) Plaintiff and Sales Performance each have “the power to designate”
one manager, and any action of the managers must be unanimous. (Operating
Agreement §§ 5.3(a), 5.4, 5.5, 5.8.) Likewise, the Operating Agreement prohibits
amendment of the articles of organization, conversion of STO into another form of
business, voluntary dissolution or liquidation, and numerous other actions in the
absence of “the approval of Members holding one hundred percent” of the membership
interest units. (Operating Agreement § 6.3.)
31. Plaintiff has been able to identify only one action that the Operating
Agreement authorizes Sales Performance to take without Plaintiff’s cooperation or
approval: determining the amount to pay the managers for their services. (Operating
Agreement § 5.6; see also Operating Agreement § 6.2.) It may well be that Sales
Performance is obliged to exercise this power fairly and in good faith. The complaint
does not allege that it has been abused, and in any event, it is insufficient standing
alone to turn Sales Performance’s majority interest into a controlling interest for
other purposes.
32. In view of the comprehensive terms of the Operating Agreement, Plaintiff
has failed to allege the control necessary to demonstrate a fiduciary relationship
between STO’s members. Plaintiff successfully bargained for numerous protections
for its minority interest. Imposing an additional fiduciary duty on Sales Performance
(the majority interest owner), outside of its contractual duties, would be inconsistent
with the parties’ bargain and with this State’s policy of “giv[ing] the maximum effect
to the principle of freedom of contract and the enforceability of operating agreements.” N.C. Gen. Stat. § 57D-10-01(c); see also Related Westpac LLC v. JER
Snowmass LLC, C.A. No. 5001-VCS, 2010 Del. Ch. LEXIS 158, at *30–31 (Del. Ct.
Ch. July 23, 2010) (applying Delaware law and holding that “[w]hen a fiduciary duty
claim is plainly inconsistent with the contractual bargain struck by parties to an LLC
. . ., the fiduciary duty claim must fall”).
33. The Court has considered and finds unpersuasive Plaintiff’s other
arguments, including its contention that STO’s status as a joint venture gives rise to
an independent fiduciary relationship. Plaintiff and Sales Performance chose to
organize their joint enterprise as an LLC, and it is therefore subject to the laws
governing LLCs. Moreover, the complaint does not allege a fiduciary relationship on
this basis. See Se. Shelter Corp., 154 N.C. App. at 327, 572 S.E.2d at 204–05
(discussing “essential elements of a joint venture”).
34. The Court therefore grants the motion to dismiss the claim for breach of
fiduciary duty. Having concluded that no fiduciary relationship has been alleged, the
Court need not address Defendants’ alternative argument that the Operating
Agreement disclaimed any fiduciary duties.
D. Unjust Enrichment
35. Plaintiff’s unjust enrichment claim is based on the allegation that it
“provided a benefit to the Defendants in the form of access to its intellectual
property.” (Compl. ¶ 53.) Defendants seek to dismiss the claim solely on the ground
that unjust enrichment is not an appropriate remedy where the parties have an
express contract (here, the IP Agreement). (Defs.’ Br. 16–17.) 36. The Court concludes that Plaintiff may plead its unjust enrichment claim in
the alternative. It is unclear whether the claim for breach of the IP Agreement (which
is between Plaintiff and Sales Performance only) perfectly aligns with the claim for
unjust enrichment (which is against all Defendants), and the limited briefing on the
issue does not provide a reasoned basis for dismissing the claim as to Sales
Performance but not as to the Individual Defendants. Defendants may eventually
succeed in demonstrating that the IP Agreement bars any recovery for unjust
enrichment, but the better course is not to dismiss the unjust enrichment claim at
this stage despite the claim for breach of contract. The Court therefore denies the
motion to dismiss the claim for unjust enrichment. See, e.g., Krawiec v. Manly, 2016
NCBC LEXIS 7, at *31 (N.C. Super. Ct. Jan. 22, 2016) (denying motion to dismiss
unjust enrichment claim).
III. CONCLUSION
37. For these reasons, the Court GRANTS the motion to dismiss the claims for
conversion, unfair or deceptive trade practices, and breach of fiduciary duty. Plaintiff
has not previously amended its complaint or attempted to cure any defects in its
pleading, and these claims are therefore DISMISSED without prejudice. See First
Fed. Bank v. Aldridge, 230 N.C. App. 187, 191, 749 S.E.2d 289, 292 (2013) (“The
decision to dismiss an action with or without prejudice is in the discretion of the trial
court.”). The Court DENIES the motion as to the claim for unjust enrichment. This the 7th day of August, 2017.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases