Strategic Mgmt. Decisions, LLC v. Sales Performance Int'l, LLC

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