Velocity Sols., Inc. v. Bsg, LLC

Velocity Sols., Inc. v. BSG, LLC, 2016 NCBC 19.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF NEW HANOVER 15 CVS 1059

VELOCITY SOLUTIONS, INC.; and )
INTELLIGENT LIMIT SYSTEM, )
LLC, )
)
Plaintiffs, )
)
v. )
)
ORDER & OPINION
BSG, LLC d/b/a BSG FINANCIAL, )
LLC and d/b/a BANK STRATEGY )
GROUP; HOGHAUG CONSULTING, )
LLC; and ERIK M. HOGHAUG, )
Individually, )
)
Defendants. )
)

{1} THIS MATTER is before the Court on (1) BSG’s Motion for Judgment
on the Pleadings (“BSG’s Motion”), (2) Defendant Hoghaug Consulting, LLC and
Defendant Erik M. Hoghaug’s Joint Motion to Dismiss (“Hoghaug Defendants’
Motion”), (3) Plaintiffs’ Motion to Dismiss BSG, LLC’s Counterclaims or, in the
Alternative, for Judgment on the Pleadings Pursuant to Rules 12(b)(6) and 12(c)
(“Plaintiffs’ Motion to Dismiss BSG’s Counterclaims”), and (4) Plaintiffs’ Motion to
Dismiss Hoghaug Defendants’ Counterclaims or, in the Alternative, for Judgment
on the Pleadings Pursuant to Rules 12(b)(6) and 12(c) (“Plaintiffs’ Motion to Dismiss
Hoghaug Defendants’ Counterclaims”) (collectively, “Motions”). BSG’s Motion is
GRANTED IN PART and DENIED IN PART, the Hoghaug Defendants’ Motion is
DENIED, and Plaintiffs’ motions are GRANTED IN PART and DENIED IN PART.
Murchison, Taylor & Gibson, PLLC by Andrew K. McVey for Plaintiffs.

Van Hoy, Reutlinger, Adams & Dunn, PLLC by Stephen J. Dunn for
Defendant BSG, LLC d/b/a BSG Financial, LLC and d/b/a Bank Strategy
Group.
Fisher & Phillips LLP by J. Michael Honeycutt for Defendants Hoghaug
Consulting, LLC and Erik M. Hoghaug.

Gale, Chief Judge.

I. PROCEDURAL HISTORY

{2} This lawsuit follows an earlier action in this Court that was
voluntarily dismissed on December 23, 2014. Notice of Voluntary Dismissal
Without Prejudice, Velocity Sols., Inc. v. BSG, LLC, No. 14 CVS 557 (N.C. Super.
Ct. Dec. 23, 2014).
{3} On March 30, 2015, Plaintiffs Velocity Solutions, Inc. (“Velocity”) and
Intelligent Limit System, LLC (“ILS”) initiated the present lawsuit against
Defendants BSG, LLC (“BSG”), Hoghaug Consulting, LLC (“Hoghaug Consulting”),
and Erik M. Hoghaug (“Erik Hoghaug”).1 The case was designated as a complex
business case and assigned to this Court on March 31, 2015.
{4} Plaintiffs filed their Amended Complaint on June 26, 2015, alleging
claims for breach of contract and for unfair and deceptive trade practices under
section 75-1.1 of the North Carolina General Statutes.
{5} On August 3, 2015, BSG filed BSG’s Motion pursuant to Rule 12(c) of
the North Carolina Rules of Civil Procedure (“Rule(s)”), and the Hoghaug
Defendants filed the Hoghaug Defendants’ Motion pursuant to Rule 12(b)(6).
{6} Also on August 3, 2015, the Hoghaug Defendants and BSG separately
filed counterclaims against Plaintiffs, alleging claims for tortious interference with
contract, tortious interference with prospective economic advantage, and unfair and
deceptive trade practices.
{7} On September 2, 2015, Plaintiffs filed two motions to dismiss the
counterclaims pursuant to Rule 12(b)(6), alternatively asking for judgment on the
pleadings pursuant to Rule 12(c).

1 Hoghaug Consulting and Erik Hoghaug, collectively, are referred to as the Hoghaug Defendants

throughout this Order & Opinion.
{8} The Motions were fully briefed, the Court heard oral argument on
November 3, 2015, and the Motions are ripe for ruling.

II. FACTUAL BACKGROUND

{9} Velocity is a North Carolina corporation.
{10} ILS is a North Carolina limited liability company.
{11} BSG is a Kentucky limited liability company that does business under
the names BSG Financial, LLC and Business Strategy Group.
{12} Plaintiffs and BSG are in the business of providing overdraft-
protection risk management, overdraft-consulting services, and software solutions
to financial institutions.
{13} Erik Hoghaug is a former Velocity employee who currently resides in
Texas.
{14} Hoghaug Consulting is a Texas limited liability company that was
formed by Erik Hoghaug in June 2012. Hoghaug Consulting entered a consulting
contract with BSG. BSG has not employed Erik Hoghaug.
{15} During his employment with Velocity, Erik Hoghaug worked as a
managing director and consultant. In that position, he acquired knowledge of
Plaintiffs’ confidential and proprietary information relating to Plaintiffs’ business
practices, including certain software that Velocity developed in response to federal
regulations for overdraft services in 2010.
{16} As a condition of employment, Velocity requires all of its employees
that will have access to Velocity’s confidential and proprietary information to sign a
confidentiality agreement.
{17} Erik Hoghaug signed an employment agreement on September 2, 2008.
The agreement included confidentiality, nondisclosure, and nonsoliciation
provisions that survive the termination of Erik Hoghaug’s employment. (Am.
Compl. Ex. A ¶¶ 6, 7.)
{18} Erik Hoghaug left his employment at Velocity in mid-2012.
{19} Plaintiffs allege that, around May 2012, BSG engaged Erik Hoghaug to
assist BSG in developing overdraft-management software and a marketing strategy
for the software. They further allege that the Hoghaug Defendants used Plaintiffs’
proprietary information to develop the software for BSG, and that Defendants have
used Plaintiffs’ confidential information to identify potential customers and to
market their software to Plaintiffs’ customers, thereby breaching the employment
covenants.

III. ANALYSIS

A. BSG’s Motion

{20} BSG moves for judgment on the pleadings under Rule 12(c) on
Plaintiffs’ claims for breach of contract and unfair and deceptive trade practices,
arguing first that BSG has no contract with Plaintiffs and cannot be held
vicariously liable for any potential breach of contract by Erik Hoghaug, and second
that its alleged conduct does not support an independent unfair and deceptive trade
practices claim under section 75-1.1.

1. Legal Standard

{21} A motion for judgment on the pleadings under Rule 12(c) “is the proper
procedure when all the material allegations of fact are admitted in the pleadings
and only questions of law remain.” Ragsdale v. Kennedy, 286 N.C. 130, 137, 209
S.E.2d 494, 499 (1974). Judgment on the pleadings is generally inappropriate when
the pleadings fail to resolve all the factual issues. Id.
{22} When the Court reviews a complaint under Rule 12(c), it may consider
documents “attached to and incorporated within a complaint.” Weaver v. Saint
Joseph of the Pines, Inc., 187 N.C. App. 198, 204, 652 S.E.2d 701, 707 (2007).
However, “a document attached to the moving party’s pleading may not be
considered in connection with a Rule 12(c) motion unless the non-moving party has
made admissions regarding the document.” Id. at 205, 652 S.E.2d at 708. The
Court “is required to view the facts and permissible inferences in the light most
favorable to the nonmoving party.” Ragsdale, 286 N.C. at 137, 209 S.E.2d at 499.
Thus, a Rule 12(c) motion should be denied “unless it is clear that plaintiff is not
entitled to any relief under any statement of the facts.” Praxair, Inc. v. Airgas, Inc.,
No. 98 CVS 8571, 1999 NCBC LEXIS 5, at *8 (N.C. Super. Ct. May 26, 1999).

2. The Breach of Contract Claim

{23} Plaintiffs seek to impose vicarious liability on BSG for Erik Hoghaug’s
breach of his employment contract. BSG asserts that it has never employed Erik
Hoghaug, so that vicarious liability cannot be imposed on BSG.
{24} Under the North Carolina doctrine of respondeat superior, “a principal
generally is liable for the negligent acts of his agent which result in injury to
another.” Bridgestone/Firestone, Inc. v. Ogden Plant Maint. Co. of N.C., 144 N.C.
App. 503, 507, 548 S.E.2d 807, 811 (2001) (quoting Willoughby v. Wilkins, 65 N.C.
App. 626, 633, 310 S.E.2d 90, 95 (1983)). Vicarious liability may be imposed where
there is an employer–employee relationship. See Gordon v. Garner, 127 N.C. App.
649, 658, 493 S.E.2d 58, 63 (1997). However, the respondeat superior doctrine does
not generally impose vicarious liability for the acts of an independent contractor.
Id. at 649, 493 S.E.2d at 64 (defining an independent contractor as “one who
exercises an independent employment and contracts to do certain work according to
his own judgment and method, without being subject to his employer except as to
the result of his work” (quoting Youngblood v. N. State Ford Truck Sales, 321 N.C.
380, 384, 364 S.E.2d 433, 437 (1988))).
{25} The Amended Complaint does not allege that Erik Hoghaug is
employed by BSG in any capacity. The pleadings make clear that Hoghaug
Consulting has served as a contractor rather than as BSG’s employee. The
Amended Complaint includes no more than a conclusory allegation that BSG is
liable under a respondeat superior theory. (See Am. Compl. ¶ 7.) The Court is not
bound to accept Plaintiffs’ legal conclusions.
{26} Accordingly, after viewing the facts and permissible inferences in the
light most favorable to Plaintiffs, the Court finds no basis for Plaintiffs’ breach-of-
contract claim against BSG. Accordingly, BSG’s Motion is GRANTED as to this
claim.

3. The Section 75-1.1 Claim Against BSG

{27} Plaintiffs assert that BSG is nevertheless directly liable under section
75-1.1.
{28} To state a claim under section 75-1.1, Plaintiffs must allege that BSG
(1) “committed an unfair or deceptive act or practice,” (2) the unfair or deceptive act
or practice was “in or affecting commerce,” and (3) BSG’s “act proximately caused
injury” to Plaintiffs. Bumpers v. Cmty. Bank of N. Va., 367 N.C. 81, 88, 747 S.E.2d
220, 226 (2013) (quoting Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711
(2001)); see also N.C. Gen. Stat. § 75-1.1(a) (2015).
{29} The Court has dismissed the breach of contract claim against BSG.
{30} Plaintiffs allege that BSG is liable because Erik Hoghaug was
specifically engaged and directed to utilize Plaintiffs’ confidential and proprietary
information in order to achieve competitive gain for BSG. Plaintiffs admit that
contracting and working with either of the Hoghaug Defendants to compete with
Plaintiffs would not be improper if BSG did not request the Hoghaug Defendants to
improperly utilize Plaintiffs’ confidential and proprietary information.
{31} Cognizant that it is reviewing the claims at the pleading stage
pursuant to relaxed standards, the Court concludes that there are disputed
allegations as to whether BSG engaged the Hoghaug Defendants for the express
purpose of accessing Plaintiffs’ confidential and proprietary information in order to
compete against Plaintiffs. The Court expresses no opinion as to whether these
allegations will ultimately survive under the more rigorous summary judgment
standard.
{32} For the reasons stated above, BSG’s Motion is DENIED as to the
section 75-1.1 claim.
B. The Hoghaug Defendants’ Joint Motion to Dismiss

1. Legal Standard

{33} The Court should grant a motion to dismiss under Rule 12(b)(6) when
any of three things is true: (1) no law supports the plaintiff’s claim, (2) the
complaint does not plead sufficient facts to state a legally sound claim, or (3) the
complaint discloses a fact that defeats the plaintiff’s claim. Oates v. JAG, Inc., 314
N.C. 276, 278, 333 S.E.2d 222, 224 (1985). When the Court reviews a complaint
under Rule 12(b)(6), it accepts the factual allegations of the complaint as true
without assuming the veracity of the plaintiff’s legal conclusions. See Walker v.
Sloan, 137 N.C. App. 387, 392, 592 S.E.2d 236, 241 (2000).

2. Breach of the Employment Contract

{34} To state a claim for breach of contract, Plaintiffs must first allege “(1)
[the] existence of a valid contract and (2) breach of the terms of that contract.” One
Beacon Ins. Co. v. United Mech. Corp., 207 N.C. App. 483, 487, 700 S.E.2d 121, 124
(2010) (quoting Ahmadi v. Triangle Rent A Car, Inc., 203 N.C. App. 360, 362, 691
S.E.2d 101, 103 (2010)).
{35} The Hoghaug Defendants do not contest that Erik Hoghaug executed
an employment contract with Velocity. However, they vigorously deny that
Plaintiffs have any facts upon which to assert any breach of that contract.
{36} For the same reasons discussed above, the Court concludes that the
Amended Complaint alleges minimally sufficient facts to sustain a breach of
contract claim, first against Erik Hoghaug as a party to the contract, and second
against Hoghaug Consulting, of which Erik Hoghaug is the principal.
{37} However, in so concluding, the Court has carefully considered Erik
Hoghaug’s argument that he is being exposed to the expense and burden of broad
discovery based upon allegations that are grounded only on Plaintiffs’ alleged
information and belief, which Defendants characterize as unfounded conjecture.2
{38} The Court addresses that concern by controlling discovery in the
manner noted below.

3. Plaintiffs’ Section 75-1.1 Claim Against the Hoghaug Defendants

{39} Plaintiffs not only allege that the Hoghaug Defendants are liable for
breach of contract but also that the breach rises to the level of an actionable claim
under section 75-1.1. Plaintiffs again rely exclusively on their assertion that the
Hoghaug Defendants have improperly used Plaintiffs’ proprietary and confidential
information.
{40} It is well established “that a mere breach of contract, even if
intentional, is not sufficiently unfair or deceptive to sustain an action under
[section] 75-1.1.” Nucor Corp. v. Prudential Equity Grp., LLC, 189 N.C. App. 731,
739, 659 S.E.2d 483, 488 (2008) (quoting Eastover Ridge, LLC v. Metric
Constructors, Inc., 139 N.C. App. 360, 367–68, 533 S.E.2d 827, 832–33 (2000)). To
recover under section 75-1.1 for a breach of contract, “[a] plaintiff must show
substantial aggravating circumstances attending the breach.” Id. (quoting Eastover
Ridge, LLC, 139 N.C. App. at 368, 533 S.E.2d at 833).
{41} Plaintiffs assert that they have alleged such aggravating
circumstances because Erik Hoghaug engaged in unfair conduct “when he sought
out Plaintiffs’ clients and prospective clients on behalf of BSG and led those
customers to believe that the BSG product has the same functionality as Plaintiffs’
software solution, but that the BSG product costs less.” (Pls.’ Br. Opp’n Hoghaug
Defs.’ Mot. Dismiss 7; see also Am. Compl. ¶ 24.) Plaintiffs claim that they will be

2 Plaintiffs referred in their pleadings and at oral arguments to the doctrine of inevitable disclosure.
(See, e.g., Am. Compl. ¶ 36.) This doctrine is of uncertain application in North Carolina. See Analog
Devices, Inc. v. Michalski, 157 N.C. App. 462, 470, 579 S.E.2d 449, 454–55 (2003). More importantly,
here, the doctrine is properly applied in support of an injunction prohibiting an employee’s potential
employment, and not to prove actual harm as a result of that employment. In this case, Plaintiffs
must demonstrate proof of actual harm based on wrongful acts.
able to prove that Erik Hoghaug was able to make such statements solely because of
his improper use of Plaintiffs’ proprietary and confidential information.
{42} As noted, Plaintiffs’ claims are largely grounded on their “information
and belief.” Ultimately, Plaintiffs will have to prove such belief with well-grounded
facts. The Court concludes that Plaintiffs section 75-1.1 claims survive the motions
to dismiss, as do their breach of contract claims. The section 75-1.1 claim should
proceed with the caution that costs, including attorneys’ fees, may be imposed if the
course of this litigation leads to events that satisfy the standards that allow such
costs pursuant to section 75-16. Accordingly, the Hoghaug Defendants’ Motion to
dismiss Plaintiffs’ section 75-1.1 claim is DENIED.

C. Plaintiffs’ Motions to Dismiss Defendants’ Counterclaims

{43} The Hoghaug Defendants and BSG each counterclaim for Plaintiffs’
alleged unfair and deceptive trade practices and for tortious interference with
prospective economic advantage. The Hoghaug Defendants also allege a claim for
tortious interference with contract.

1. Tortious Interference with Prospective Economic Advantage

{44} To state a claim for tortious interference with prospective economic
advantage, “a plaintiff must put forth evidence that a defendant interfered with a
trade or business 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.” Inland
Am. Winston Hotels, Inc. v. Winston, 2010 NCBC LEXIS 21, at *28 (citing Spartan
Equip. Co. v. Air Placement Equip. Co., 263 N.C. 549, 559, 140 S.E.2d 3, 11 (1965)).
{45} Defendants allege that Plaintiffs tortiously interfered with their
prospective economic advantage by (1) pursuing the litigation to force Defendants to
disclose the lawsuits in requests for proposals for projects, (2) knowingly making
false allegations in their pleadings, and (3) inducing and causing third parties to
refrain from conducting lawful business with Defendants. Defendants claim that,
but for Plaintiffs’ unjustified, wrongful actions, Defendants would have engaged in
economically advantageous business transactions.
{46} Plaintiffs argue that Defendants’ claims for tortious interference with
prospective economic advantage must fail because Defendants have not identified a
“specific contractual opportunity” that would have ensued but for Plaintiffs’ alleged
interference. However, the North Carolina Supreme Court has rejected the notion
that a claim for tortious interference with prospective economic advantage requires
evidence of a specific contractual opportunity. See Owens v. Pepsi Cola Bottling Co.
of Hickory, N.C., Inc., 330 N.C. 666, 680–81, 412 S.E.2d 636, 644–45 (1992)
(reversing the court of appeals’s holding that there was insufficient evidence to
support a tortious-interference claim on summary judgment where the plaintiff
failed to show that any contracts were disrupted); Coleman v. Whisnant, 225 N.C.
494, 506, 35 S.E.2d 647, 656 (1945) (holding that a claim for tortious interference
with prospective economic advantage may be based on conduct that prevents the
making of contracts).
{47} Plaintiffs further contend that, even if they did otherwise interfere
with Defendants’ business opportunities, they were justified in doing so as a
competitor. The Court concludes that this defense must await a more developed
factual record and is not adequate to sustain an early dismissal of the counterclaim.
{48} Accordingly, Plaintiffs’ motions are DENIED with regard to
Defendants’ claims for tortious interference with prospective economic advantage.

2. Tortious Interference with Contract

{49} A claim for tortious interference with contract includes five elements:
(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).
{50} The Hoghaug Defendants allege that Plaintiffs intentionally interfered
with the contractual relationship between Hoghaug Consulting and BSG by filing
this lawsuit, and that the interference resulted in damages. The sole basis of that
allegation is the consulting contract between Hoghaug Consulting and BSG, which
was ultimately renewed rather than terminated. The Court concludes that, under
these facts, the counterclaim for tortious interference with contract must fail. See
DaimlerChrysler Corp. v. Kirkhart, 148 N.C. App. 572, 584–85, 561 S.E.2d 276, 286
(2002) (dismissing a claim for tortious interference with contract where the plaintiff
failed to identify any specific contract with the plaintiff that a third party was
induced not perform as a result of the defendants’ conduct).
{51} Accordingly, Plaintiffs’ motions to dismiss should be granted as to the
counterclaims for tortious interference with contract.

3. The Section 75-1.1 Counterclaim

{52} Plaintiffs move to dismiss Defendants’ section 75-1.1 counterclaims on
the grounds that the claims are barred by the Noerr–Pennington doctrine, which
provides that a party who seeks redress by filing a lawsuit is immune from claims
that are based solely on the pursuit of that lawsuit. See E. R.R. Presidents
Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 139 (1961). That immunity
can be lost if the litigation is only a sham. Under the sham-litigation exception to
the Noerr–Pennington doctrine, “[t]he institution of a lawsuit may be the basis for
an unfair trade practices claim if the lawsuit is a mere sham to cover what is
actually nothing more than an attempt to interfere directly with the business
relationships of a competitor.” United States v. Ward, 618 F. Supp. 884, 907
(E.D.N.C. 1985); see also Reichhold Chems., Inc. v. Goel, 146 N.C. App. 137, 157,
555 S.E.2d 281, 293 (2001) (stating that a plaintiff does not violate section 75-1.1 by
pursuing an objectively reasonable lawsuit).
{53} Proving that the filing of a lawsuit is a mere sham carries an
extremely high burden, and, even if the Court assumes that an action was “brought
‘for no legitimate purpose’ and with a subjective anti-competitive intent, it can still
conclude that the suit is ‘objectively reasonable’ because it is not ‘utterly baseless.’”
Lorillard Tobacco Co. v. R.J. Reynolds Tobacco Co., No. 10-CVS-11471, 2011 NCBC
LEXIS 31, at *18 (N.C. Super. Ct. Aug. 8, 2011) (quoting Reichhold Chems., Inc.,
146 N.C. App. at 157, 555 S.E.2d at 293).
{54} It is evident that Defendants’ section 75-1.1 claims are grounded solely
on Plaintiffs’ prosecution of this lawsuit for an alleged improper purpose. Although
it reserves its consideration of whether to impose costs, including attorneys’ fees,
because Plaintiffs’ are prosecuting their own section 75-1.1 claim, the Court
concludes that Plaintiffs have filed this suit with a general intent to obtain
monetary relief, and that there is no reason for the Court to conclude that the suit is
utterly baseless or that Plaintiffs’ Amended Complaint is “a mere sham to cover
what is nothing more than an attempt to interfere directly with . . . a competitor.”
GoldToeMoretz, LLC v. Implus Footcare, LLC, No. 5:09-CV-0072, 2010 U.S. Dist.
LEXIS 90828, at *16 (W.D.N.C. Aug. 31, 2010) (quoting Ward, 618 F. Supp. at 907).
{55} Accordingly, Plaintiffs’ motions to dismiss Defendants’ section 75-1.1
counterclaims are GRANTED.

D. Controlling Discovery

{56} The Court, in its discretion and considering the degree to which the
Amended Complaint is based on information and belief, determines that discovery
should be carefully controlled.
{57} Prior to seeking further discovery from Defendants, particularly
before deposing Erik Hoghaug, Plaintiffs shall provide within twenty days of the
date of the entry of this Order & Opinion an interrogatory response detailing the
factual basis on which it alleges that the Defendants have improperly used
Plaintiffs’ confidential and proprietary information. Within twenty days of
receiving this interrogatory response, Defendants may depose Plaintiffs’ Rule
30(b)(6) designee regarding those allegations and the investigations on which the
allegations are based. Within thirty days of the earlier of this deposition or the
expiration of twenty days after serving its interrogatory response, Plaintiffs may
depose two actual or potential customers to develop facts in support of their claims.
The parties shall advise the Court once this initial discovery has been completed,
after which the Court will convene a status conference to determine the appropriate
course of further discovery and motion practice.

IV. CONCLUSION

{58} The Court hereby orders that
1. BSG’s Motion is GRANTED as to Plaintiffs’ claim for breach of
contract, and DENIED as to the claim for unfair and deceptive trade
practices under section 75-1.1.
2. The Hoghaug Defendants’ Motion is DENIED.
3. Plaintiffs’ Motion to Dismiss BSG’s Counterclaims is GRANTED as to
the section 75-1.1 claim, and DENIED as to the claim for tortious
interference with prospective economic advantage.
4. Plaintiffs’ Motion to Dismiss Hoghaug Defendants’ Counterclaims is
GRANTED as to the section 75-1.1 claim and the tortious interference
with contract claim, and DENIED as to the claim for tortious
interference with prospective economic advantage.
5. Discovery shall only proceed as provided above.

IT IS SO ORDERED, this the 22nd day of February, 2016.

/s/ James L. Gale
James L. Gale
Chief Special Superior Court Judge
for Complex Business Cases