Composite Fabrics of Am., LLC v. Edge Structural Composites, Inc.

Composite Fabrics of Am., LLC v. Edge Structural Composites, Inc., 2016 NCBC 11.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF ALEXANDER 15 CVS 453

COMPOSITE FABRICS OF )
AMERICA, LLC, )
)
Plaintiff, )
)
v. )
ORDER ON OPPOSITION TO
)
NOTICE OF DESIGNATION
EDGE STRUCTURAL COMPOSITES, )
INC.; BRITISH RACING IMPORTS & )
TRACK SERVICES, INC.; and EDGE )
STRUCTURAL COMPOSITES, LLC, )
)
Defendants. )
)

{1} THIS MATTER is before the Court on Plaintiff Composite Fabrics of
America, LLC’s (“CFA”) Opposition to Notice of Designation (“Opposition”). The
Opposition relies heavily on the notion that designation involves a matter of
subject-matter jurisdiction. This widely held perception is based in part on the
Court’s past use of terms like “jurisdiction,” “removal,” and “remand” in its rules
and prior orders.
{2} The Court takes this opportunity to clarify both that the Business
Court is not a court of separate jurisdiction and how the Court interprets the
statutory mandates for designating a case as a mandatory complex business case.
{3} For reasons explained below, the Court defers its further consideration
of the Opposition pending CFA’s consideration of this Order.
Bell, Davis & Pitt, P.A. by Alan M. Ruley and Andrew A. Freeman for
Plaintiff Composite Fabrics of America, LLC.

Nexsen Pruet, PLLC by Peter A. Santos and Jonathan E. Schulz for
Defendants Edge Structural Composites, Inc. and British Racing Imports &
Track Services, Inc.
Gale, Chief Judge.
I. FACTUAL AND PROCEDURAL BACKGROUND

{4} This lawsuit arises from an agreement between CFA and Defendant
Edge Structural Composites, Inc. (“Edge, Inc.”), dated January 29, 2014
(“Agreement”). Under the Agreement, Edge, Inc. agreed to introduce CFA to
prospective customers, and CFA agreed to pay a fee or royalty to Edge, Inc. for net
sales to customers governed by the Agreement. The parties contemplated that some
CFA customers would use proprietary data developed and owned by Edge, Inc. to
obtain a certification of code compliance known as an ICC-ES report. A
disagreement exists about, among other things, whether Edge, Inc. should be paid
commissions on CFA’s sales to certain customers.
{5} CFA filed a Verified Complaint (“First Complaint”) against Edge, Inc.
as the sole defendant on August 14, 2015, in the superior court of Alexander
County, North Carolina. On September 25, 2015, Edge, Inc. removed the case to
the United States District Court for the Western District of North Carolina. The
case was remanded on November 12, 2015.
{6} CFA filed its First Amended Complaint (“Amended Complaint”) on
December 17, 2015, against Edge, Inc., British Racing Imports & Track Services,
Inc. (“BRITS”), and Edge Structural Components, LLC (“Edge LLC”).
{7} Edge, Inc. and BRITS filed a Notice of Designation (“NOD”) on
January 8, 2016, certifying that this lawsuit qualifies as a mandatory complex
business case involving material issues of intellectual-property law and trade-
secrets law under subsections 7A-45.4(a)(5) and 7A-45.4(a)(8) of the North Carolina
General Statutes. N.C. Gen. Stat. § 7A-45.4(a)(5), (8) (2015). No counterclaim had
been made when the NOD was filed.
{8} Chief Justice Mark Martin designated the case as a mandatory
complex business case on January 11, 2016, and the case was assigned to this Court
later that day.
{9} CFA timely filed its Opposition on January 13, 2016, asserting that
this lawsuit does not involve material issues relating to the ownership or use of
either intellectual property or trade secrets. Thus, CFA concludes that the Court
lacks “jurisdiction” over this lawsuit. (Opp’n to NOD 2 n.1 (quoting Clements v.
Clements ex rel. Craige, 219 N.C. App. 581, 586, 725 S.E.2d 373, 377 (2012)).) CFA
notes, however, that it “would not be opposed to proceeding in the Business Court if
this action did in fact meet the jurisdictional requirements.” (Opp’n to NOD 2 n.1;
see also Reply Supp. Pl.’s Opp’n to NOD (“Reply”) 1, 13.)
{10} Edge, Inc. and BRITS filed an Answer and Counterclaims on January
21, 2016.1 Edge, Inc., as the sole counterclaimant, asserts counterclaims against
CFA for breach of contract, breach of the covenant of good faith and fair dealing,
fraud, and unfair and deceptive trade practices.2
{11} Edge, Inc. and BRITS filed a Response in Support of Business Court
Designation on January 28, 2016. Their argument in favor of designation draws
from claims in both the Amended Complaint and the counterclaims.3
{12} The parties have each submitted briefs on the issue of designation, and
the Opposition is now ripe for ruling.

II. PROCEDURAL ISSUES REGARDING DESIGNATION

{13} This case was designated and assigned to the Business Court based on
the NOD, which certifies that the case qualifies as a mandatory complex business
case under section 7A-45.4(a). Mandatory designations are distinct from
discretionary designations and are governed by statutory time periods, which this
Court has applied strictly. These time limitations do not apply when a party seeks
a “discretionary” request from the senior resident superior court judge to the Chief
Justice of the North Carolina Supreme Court under Rule 2.1 of the General Rules of
Practice for the Superior and District Courts (“General Rules” or “Rule(s)”).

1 Edge, Inc. and BRITS note that Edge LLC has not been served with process in this lawsuit and

that Edge LLC has not conducted business since it ceased its operations in 2014 and subsequently
dissolved in 2015. (NOD 1 n.1; Answer and Countercls. 1 n.1.)

2 Edge, Inc. and BRITS also filed a Motion to Dismiss and a Motion to Strike on January 21, 2016.

These motions are not pertinent to the Court’s ruling on the Opposition.

3 The Court uses the terms “designation” and “Business Court designation” in this Order to mean

“mandatory complex business cases” under N.C. Gen. Stat. § 7A-45.4.
Further, a mandatory designation lies only for cases that involve material issues
within the defined categories specified in section 7A-45.4. A case may qualify for
discretionary assignment to the Business Court under Rule 2.1 if the case does not
qualify for mandatory designation under the statute but involves certain other
factors. See, e.g., BCR 3.2.
{14} The primary issues raised by the Opposition in this case involve
whether the subject matter of the particular facts and claims of this lawsuit meet
the requirements for mandatory designation based on subsections 7A-45.4(a)(5) or
(a)(8), and whether the Court can look to the counterclaims as well as the Amended
Complaint to make that determination.

A. Use of a Counterclaim to Support Designation

{15} The Court begins its discussion by noting that Edge, Inc. relies on the
mandatory designation procedure of section 7A-45.4, which provides that a party
who seeks to designate a case based on a pleading asserted against it must file a
notice of designation within thirty days of the service of that pleading. The statute
also requires that a party who seeks to base designation on its own pleading must
file a notice of designation contemporaneously with that pleading.
{16} Here, Defendants’ filings rely on both CFA’s Amended Complaint and
Edge, Inc.’s counterclaims. Edge, Inc. no longer had the right to designate the case
based on the First Complaint, as the NOD was filed substantially later than thirty
days after service of the First Complaint. The NOD was timely only because the
Amended Complaint added a new party that joined in the NOD within thirty days
of being served with the Amended Complaint. Obviously, the NOD did not rest on
any counterclaim, because no counterclaim had been filed.
{17} The Court disagrees with CFA’s suggestion that a counterclaim can
never be the basis for designation under section 7A-45.4. Section 7A-45.4(a)
provides that “[a]ny party may designate [a case] as a mandatory complex business
case” if the case falls within certain subject-matter categories. N.C. Gen. Stat.
§ 7A-45.4(a). Section 7A-45.4(c) states that a notice of designation shall be filed by
“[a] party designating an action as a mandatory complex business case.” Id.
§ 7A-45.4(c). Section 7A-45.4(d) separately provides that the notice of designation
shall be filed by any of the following:
(1) By the plaintiff, the third-party plaintiff, or the petitioner for
judicial review contemporaneously with the filing of the complaint,
third-party complaint, or the petition for judicial review in the
action.

(2) By any intervenor when the intervenor files a motion for
permission to intervene in the action.

(3) By defendant or any other party within 30 days of receipt of
service of the pleading seeking relief from the defendant or party.

(4) By any party whose pleading caused the amount in controversy
computed in accordance with G.S. 7A-243 to equal or exceed five
million dollars ($5,000,000) contemporaneously with the filing of
that pleading.
Id. § 7A-45.4(d).

{18} The text of section 7A-45.4(d) does not expressly include “counterclaim
plaintiffs” or “counterclaims.” The Court interprets “plaintiff or third-party
plaintiff” and “complaint” or “third-party complaint” in subsection 7A-45.4(d)(1) to
include counterclaim plaintiffs and counterclaims. See id. § 7A-45.4(d)(1).
Likewise, “defendant or any other party” includes the party against whom the
counterclaim is being asserted. Id. § 7A-45.4(d)(3). In the instance where a
counterclaim is the basis for designation, for purposes of applying section 7A-45.4,
the counterclaimant would be the “plaintiff,” and the party against whom the
counterclaim is being asserted would be the “defendant,” who then has a right to
oppose designation within thirty days of service of the counterclaim. See id.
§ 7A-45.4(d)(1), (3).
{19} Thus, a party may use its counterclaim as the basis for a notice of
designation. See, e.g., Order Denying Defendant’s Opposition to Designation,
RS&M Appraisal Servs., Inc. v. Alamance County, No. 09 CVS 1961 (N.C. Super.
Ct. Feb. 18, 2010) (“But for these two counterclaims, the Court would not have
jurisdiction.”). However, if a counterclaimant wishes to rely on the opposing party’s
complaint as well as its own counterclaim as a basis for mandatory designation, the
notice of designation would need to be filed within thirty days of service of the
complaint and contemporaneously with the counterclaim. See N.C. Gen. Stat.
§ 7A-45.4(d)(3).
{20} The Court construes section 7A-45.4 to provide that a party who has
the right to seek mandatory designation based on a pleading that has been served
upon it but who does not exercise that right within the statutory time period loses
the right to seek mandatory designation and cannot later renew their right to
designation by filing a counterclaim.
{21} A different rule applies where a counterclaim is the first pleading to
raise a material issue that falls within a category that qualifies for mandatory
designation under section 7A-45.4(a). In that case, as long as the new pleading is
not being made for an improper purpose, if the party pursues mandatory
designation, the statutory time requirements for seeking designation are measured
by the new pleading. See BCR 3.1(b).4
{22} Here, Edge, Inc. filed its NOD within thirty days of being served with
the Amended Complaint but before it filed its counterclaims. Whether this case
involves material issues within the scope of section 7A-45.4(a) must therefore
depend on the allegations in the Amended Complaint.
{23} The Court is not required, however, to completely disregard Edge,
Inc.’s counterclaims. For example, the Court can consider the counterclaims to
inform it of whether CFA’s claims necessarily include material issues that fall
under subsections 7A-45.4(a)(5) or (a)(8). See Cornerstone Health Care, P.A. v.
Moore, No. 15 CVS 604, 2015 NCBC LEXIS 65, at *7 (N.C. Super. Ct. June 22,
2015) (noting that the Court’s consideration of whether a case qualifies as a
mandatory complex business case “historically [has not been] confined to the actual
causes of action asserted in a complaint, but has also examined the underlying

4 Again, these strict, statutory-based time requirements do not apply to Rule 2.1 designations.
factual allegations”); Order on Opposition to Designation of Action as Mandatory
Complex Business Case, Union Corrugating Co. v. Viechnicki¸ No. 14 CVS 6240,
slip op. at 2 (N.C. Super. Ct. Sept. 9, 2014).

B. Business Court Rule 3.2 Does Not Provide an Independent Basis for
Mandatory Designation

{24} Business Court Rule 3.2 directs any party who files a notice of
designation to not only describe how the case falls within one or more categories of
section 7A-45.4, but to further identify factors that demonstrate why the Business
Court is the appropriate venue for that case. The origins of that rule precede the
advent of mandatory designation. The Business Court Rules were adopted in 2000
and amended in 2006. The Business Court Rules supplement the North Carolina
Rules of Civil Procedure and the General Rules. Prior to 2000, the Court consisted
of only one special superior court judge, and a case could be designated as a complex
business case only through discretionary assignment by the Chief Justice. In 2006,
the number of special superior court judges assigned to hear complex business cases
was expanded, and the method for mandatory designation under section 7A-45.4
was enacted. The mandatory designation procedure and the classification of cases
within such designation was amended in 2014.
{25} The factors in Business Court Rule 3.2 are useful in managing and
assigning cases among the Business Court judges and may be useful in resolving
requests for discretionary assignments. But these factors do not provide a stand-
alone basis for mandatory designation. For a case to be certified as a mandatory
complex business case, the pleading upon which designation is based must raise a
material issue that falls within one of the categories specified in section 7A-45.4.

C. Business Court Designation Does Not Raise Issues of Subject-Matter
Jurisdiction

{26} Litigants often refer to the Business Court’s “jurisdiction.” This is
partly a result of the Court’s own terminology in its past orders and in its current
rules, which are presently under consideration for revision. Thus, the Court
appreciates why CFA would be led to present a position that is based on notions of
subject-matter jurisdiction. But, the Business Court is not a court of separate
jurisdiction.
{27} The Court is merely an administrative division of the superior court in
the General Court of Justice. A Business Court judge is a special superior court
judge who is assigned cases that originate from counties across the state. Just as a
special superior court judge may be assigned to matters in any of those counties,
when a Business Court judge is assigned to a case that has been designated as a
complex business case, whether by a mandatory or discretionary assignment, he is
commissioned to preside over that entire case until its conclusion, and he proceeds
with the same jurisdiction and authority as any other superior court judge who may
be commissioned to hear matters in that case. See Am. Mech., Inc. v. Bostic, Nos.
COA15-385, COA15-422, COA15-525, 2016 N.C. App. LEXIS 130, at *13–14 (N.C.
Ct. App. Feb. 2, 2016) (“The Business Court is a special superior court and its orders
are, therefore, ‘order[s] of a superior . . . court rendered in a civil action’ . . . .”
(alteration in original) (emphasis omitted) (quoting N.C. R. App. P. 3(a))); Sony
Ericsson Mobile Commc’ns USA, Inc. v. Agere Sys., Inc., No. 06 CVS 17673, 2007
NCBC LEXIS 28, at *7 (N.C. Super. Ct. Aug. 27, 2007) (“[T]he Business Court is not
a court of jurisdiction or venue.”), aff’d, 195 N.C. App. 577, 583, 672 S.E.2d 763, 768
(2009).
{28} A Business Court judge is vested with authority over a case as soon as
the case is assigned to him by order of the Chief Justice. Subject-matter jurisdiction
is measured by the nature of the claims in the case, not by the judge to whom it has
been assigned. The case remains venued in the county of origin, and remains in
that county whether or not the case is designated as a complex business case, and
whether or not such designation may be later withdrawn. Designation does not
“remove” the case, and withdrawing a designation because of an opposition does not
constitute a “remand.” The case has never left its county of origin.
III. CONCLUSION

{29} CFA states that it “would not be opposed to proceeding in the Business
Court if this action did in fact meet the jurisdictional requirements, but [that it] is
also mindful of the maxim that ‘subject matter jurisdiction cannot be conferred by
consent or waiver and a court cannot create it where it does not already exist.’”
(Opp’n to NOD 2 n.1 (quoting Clements, 219 N.C. App. at 586, 725 S.E.2d at 377);
see also Reply 1 (“Composite Fabrics is not opposed to proceeding in the Business
Court if this action does in fact meet the jurisdictional requirements set forth in
N.C. Gen. Stat. § 7A-45.4 . . . .”).) In light of these statements, the Court invites
CFA to reexamine its election to oppose designation after considering this Order.
{30} The Court does not intend to foreclose CFA’s choice to pursue
opposition, as it has a clear right to do so. CFA is requested to advise the Court
within ten days of the date of this Order whether it wishes to further pursue its
Opposition.
{31} The time within which CFA must file its response to Defendants’
Motion to Strike and Motion to Dismiss is held in abeyance pending further Court
order.

IT IS SO ORDERED, this the 5th day of February, 2016.

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