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  • 26 Sep 2017 12:27 PM | Lynette Pitt (Administrator)

    by Matthew Pooley, Benjamin Cotts & James Brennan, III 

    Magnetic induction has long been present in modern society, typically without the knowledge of the general public. The walk-through metal detectors at the airport and the anti-theft gates at the exits of retail stores are among the largest and most commonly-encountered sources of magnetic induction. Other smaller devices, such as hand-held metal detectors (think of the person at the beach searching for jewelry) and induction cooktops that heat cooking pans without heating the surface of the cooktop itself, also make use of magnetic induction. A somewhat different form of magnetic induction is involved in the radiofrequency identification (RFID) used to pay highway tolls without the need for stopping and the RFID used in shipping containers. Magnetic induction is even used inside the highly-specialized coils of a magnetic resonance imaging machine. The magnetic induction from each of these devices is described by Faraday’s law, a basic law of electromagnetics, which states that if a time-varying magnetic field passes through the surface of any conducting loop, a voltage will be induced in that loop. The voltage induced in this loop is proportional to the time-varying change in magnetic flux (i.e., the amount of magnetic field that enters the loop perpendicular to its surface), as shown in Figure 1.

    Figure 1. A magnetic field passing through the surface of a loop induces a voltage in the terminals of a loop.

    More recently, the mobile revolution and the explosion of wirelessly-connected devices as part of the “Internet of Things” (IoT) has created a desire to be able to conveniently charge devices without the need to plug them into a wall outlet. Wireless charging is among the fastest-growing segments of technology, particularly related to portable devices. Devices such as mobile phones, tablets, and laptop computers are being outfitted with the built-in capability to charge their batteries wirelessly. In addition, larger items such as electric vehicles will soon be available with wireless charging capabilities.

    Along with this proliferation of wireless connectivity and charging capabilities comes a potential cost, known in the industry as electromagnetic compatibility (EMC). Each of these devices (and countless others) needs to be able to operate successfully in the presence of potential interference from other devices (i.e., electromagnetic susceptibility or immunity) and each one needs to consider the possible effects of their own emissions on other devices (i.e., electromagnetic interference).

    Arguably medical devices are the most important group of devices in need of high electromagnetic immunity, particularly those with life-saving capabilities such as pacemakers and implanted cardioverter defibrillators (ICD). The need for pacemakers and ICDs to operate correctly in the presence of external magnetic-field sources is of keen interest to medical device manufacturers; it is equally important to manufacturers, distributors, and users of inductively-coupled devices that these devices operate without a disruption to their proper function. The following brief discussion focuses on pacemakers, but other implantable and wearable medical devices, such as ICDs, cochlear implants, neurostimulators, wearable continuous glucose monitors, and wearable insulin pumps, are also of concern when considering EMC.

    Pacemakers are electronic devices that are surgically implanted in patients to monitor and control irregularities in a patient’s natural heart activity. The two main functions of a pacemaker are sensing and controlling (i.e., pacing) heart rhythm. These functions involve using a pulse generator and lead wires that are configured as either unipolar (shown in Figure 2b) or bipolar (not shown). Typically, while in “sensing mode” the pacemaker monitors the patient’s heart activity through these lead wires. If only natural heart activity is present, the pacemaker will not enter the pacing mode, but if the patient’s heart rhythm is too slow or is interrupted, the pacemaker sends an electrical impulse to the heart to regulate the patient’s heartbeat.

    Figure 2. a) X-ray showing pacemaker with lead and heart (left) and the location of the pacemaker with associated skin incision (right);


    Modified from Seckler et al., 2015
    Figure 2. b) A diagram of a unipolar pacing device, with an intracardiac cathode located on the lead tip in the right ventricle (“Tip”). The circuit is completed by the housing of the device, which forms the anode.

    Electromagnetic interference with the function of a pacemaker from magnetic induction occurs when the magnetic field from an outside source passes through the loop formed by the pacemaker’s lead and the pacemaker’s housing. The potential for interference can be calculated by using Faraday’s law of induction (described above). Pacemakers are particularly susceptible to electromagnetic interference from magnetic induction because the leads of the pacemaker sense the very small levels of electrical activity within the heart and therefore small induced voltages can interfere with the proper functioning of a pacemaker. As shown in Figure 3, even a small amount of external interference induced onto the leads of a pacemaker can mask the cardiac rhythm being sensed, potentially interfering with the proper function of the pacemaker.

    Figure 3. Illustration of the potential effect of electromagnetic interference on pacemaker function. A normal cardiac rhythm (top) experiencing a magnetic noise source (middle) can cause potential interference with the pacemaker functioning (bottom).

    In general, the influence of electromagnetic interference on a pacemaker can be controlled to some extent by the patient. For example, if a patient is aware that a particular source has the potential to influence the pacemaker (information garnered through either their physician or the medical device manufacturer) then he or she can try to stay as far away as possible from the source, or can pass by the source quickly. The patient, however, has little or no control over the intrinsic properties of an electromagnetic source, such as the frequency of its operation, the modulation of the output signal, and power output.

    Since there are factors that the patient cannot control, medical device manufacturers build safeguards into the design of pacemakers. These safeguards assure that the device continues to provide clinically acceptable therapy in the presence of typically-encountered levels of electromagnetic interference. In addition, pacemakers are designed to revert to a conservative mode of operation even if the pacemaker no longer senses how the heart muscle is functioning. In this state the pacemaker will provide pacing activity at a pre-determined fixed rate. Though a pacemaker may “fly blind” without its sensing function while in the presence of a source of electromagnetic interference, it is still under software control. This operation, where the pacemaker reverts to a limited but functional state during an interference event, is known as Noise Reversion or Safety Mode.

    Since devices emitting magnetic fields are now so common in everyday life, they are often implicated in cases where a patient either had a medical incident or where a medical device malfunctioned; yet other factors need to be considered in a failure analysis, such as the influence of a patient’s overall health, the typical lifetime of a medical device, or known failure incidents of the medical device. Government resources (such as the Food and Drug Administration’s Manufacture and User Facility Device Experience [MAUDE] database) provide a way to locate information on the performance of a given device. If hundreds of thousands of devices have been implanted in patients throughout the United States over several years and no failure incidents related to electromagnetic interference have been reported, then it is important to consider other root causes for a failure. Medical devices are typically designed to operate safely in diverse electromagnetic environments, and manufacturers of devices that emit electromagnetic fields typically keep the intensity of emission as low as possible.

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  • 28 Jun 2017 11:54 AM | Lynette Pitt (Administrator)

    The 4th Circuit Joins the Discussion on Standing in Data Breach Cases
    by Patricia Heyen & Rolf Garcia-Gallont, Womble Carlyle Sandridge & Rice, LLP

    While seemingly unrelated, Ashley Madison, eBay, Sony, and Target have one thing in common; they have all, at one point or another, lost control over their highly sensitive data due to a data breach.

    As the number of reported data breaches reached an all-time high in 2016, federal courts have been grappling with the question of who should be considered a victim in the eyes of the law. To date, six circuits have addressed standing in the context of data breach litigation, with the Fourth Circuit most recently joining the discussion in Beck v. McDonald. In Beck, the Fourth Circuit held that the mere possibility that a plaintiff’s information may be misused as a result of a data breach is insufficient to establish standing.

    Beck v. McDonald

    In Beck v. McDonald, 848 F.3d 262 (4th Cir. 2017), the U.S. Fourth Circuit Court of Appeals affirmed the dismissal, for lack of subject-matter jurisdiction, of two putative class action claims against the William Jennings Bryan Dorn Veterans Affairs Medical Center (“Dorn VAMC”) and several individuals related to the Dorn VAMC.

    The plaintiffs in the consolidated appeal were veterans who received medical treatment and health care at the Dorn VAMC in Columbia, South Carolina. Beck, 848 F.3d at 266. The medical center experienced two data breaches, the result of a medical center laptop and four boxes of pathology reports being misplaced or stolen. Id. The laptop contained unencrypted personal information of approximately 7,400 patients, including names, birth dates, the last four digits of social security numbers, and physical descriptors (age, race, gender, height, and weight). Id. at 267. The pathology reports contained identifying information of over 2,000 patients, including names, social security numbers, and medical diagnoses. Id. at 268.

    Richard Beck and Lakreshia Jefferey filed suit on behalf of the approximately 7,400 patients whose information was stored on the missing laptop, and asserted claims under common-law negligence, the Privacy Act of 1974 (5 U.S.C. § 552a et seq.), and the Administrative Procedure Act (5 U.S.C. § 701 et seq.). Id. at 267. The plaintiffs alleged that the Dorn VAMC’s “failures” and “violations” of the Privacy Act caused them “embarrassment, inconvenience, unfairness, mental distress, and the threat of current and future substantial harm from identity theft and other misuse of their Personal Information.” Id. They further alleged that the threat of identity theft required them to purchase credit monitoring services, monitor financial statements, and move their financial accounts to different institutions. Id.

    Beverly Watson filed the second suit on behalf of the approximately 2,000 patients whose pathology reports had gone missing. Id. at 268. She alleged the same harm as the Beck plaintiffs, and asserted similar claims for money damages, and declaratory and injunctive relief. Id.

    The district court dismissed both suits for lack of subject-matter jurisdiction, holding that the plaintiffs lacked standing because they failed to establish that they had suffered an injury-in-fact. Id. at 268-69.

    The Fourth Circuit’s Opinion

    As a quick refresher, one of the “irreducible minimum requirements” that a plaintiff must establish to have standing to sue in federal court under Article III is an “injury in fact.” Id. at 269. “To establish injury in fact, a plaintiff must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical.” Id. at 270 (quoting Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548 (2016) (internal quotation marks omitted).

    The district court in Beck granted the defendants’ motion to dismiss, holding that the plaintiffs lacked standing under the Privacy Act. Id. at 267-68. The district court pointed to the U.S. Supreme Court’s holding in Clapper v. Amnesty International USA, 133 S. Ct. 1138, 1155 (2013), and reasoned that as to the “certainly impending” standard (i.e., an allegation of future injury can support standing to sue only if the plaintiff can demonstrate that the injury is “certainly impending”), the plaintiffs’ fear of future harm was too speculative given that it was “contingent on a chain of attenuated hypothetical events and actions by third parties independent of the defendants.” Id. at 268. The district court concluded that the plaintiffs had “not submitted evidence sufficient to create a genuine issue of material fact as to whether they face a ‘certainly impending’ risk of identity theft.” Id.

    The Fourth Circuit agreed, stating that the Beck plaintiffs failed to provide any “evidence that the information contained on the stolen laptop ha[d] been accessed or misused or that they ha[d] suffered identity theft . . . [or] that the thief stole the laptop with the intent to steal their private information.” Id. at 274. The Fourth Circuit held that the Watson complaint suffered from the same deficiency. Id. at 275. In sum, “the mere theft” of the laptop and pathology reports “without more, [did] not confer Article III standing.” Id.

    Even as to the lesser “substantial risk” standard, (i.e., a plaintiff must show that there is a “substantial risk” that the harm will occur), the Fourth Circuit determined that the plaintiffs’ calculations that approximately 33% of those individuals whose information was stored on the laptop would have their identities stolen and that all individuals whose information was stored on the laptop would be 9.5 times more likely to experience identity theft was insufficient to establish a “substantial risk” of identity theft. Id.

    Both the district court and the Fourth Circuit Court of Appeals relied on Clapper to determine what is required of a plaintiff to prove an injury-in-fact based on a threatened injury: the threatened injury must be “certainly impending,” or there must be a “substantial risk” that the harm will occur such that a party may reasonably incur costs to mitigate or avoid the harm. Id. at 272, 275.

    Certainly Impending

    The Fourth Circuit applied the “certainly impending” test for the first time in the context of a data breach case, and looked to the First, Third, Sixth, Seventh, and Ninth Circuits for guidance. See id. at 273-74 (citing Galaria v. Nationwide Mut. Ins. Co., No. 15–3386, 663 Fed.Appx. 384, 387–89, 2016 WL 4728027, at *3 (6th Cir. Sept. 12, 2016); Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688, 692, 694–95 (7th Cir. 2015); Krottner v. Starbucks Corp., 628 F.3d 1139, 1142–43 (9th Cir. 2010); Pisciotta v. Old Nat'l Bancorp, 499 F.3d 629, 632–34 (7th Cir. 2007); Katz v. Pershing, LLC, 672 F.3d 64, 80 (1st Cir. 2012); Reilly v. Ceridian Corp., 664 F.3d 38, 40, 44 (3d Cir. 2011)). Ultimately, the Fourth Circuit distinguished the facts of the case before it from those decided by its sister circuits, and provided some hints as to what evidence would establish “certainly impending” injury: specific misuse of the personal information and intent to steal the personal information. However, the Beck court emphasized that its decision does not require a plaintiff to show that the stolen information has already been misused—such evidence has merely proven to be sufficient before other courts in the past. See id. at 275.

    Substantial Risk

    With regard to the “substantial risk” standard, the court’s decision provides unclear guidance for future plaintiffs. While the court unambiguously held that the Beck plaintiffs’ calculations of increased risk did not amount to a “substantial risk,” the court also declined to set a numerical “floor.” See id. at 275-76. While plaintiffs will face some uncertainty when bringing data breach cases going forward, at the very least, plaintiffs can rely on the fact that calculations such as those put forth in Beck will not suffice.

    Have You Been Injured (in the Eyes of the Fourth Circuit)?

    Although the Fourth Circuit did not state so outright, its analysis in Beck strongly indicates that the “certainly impending” and “substantial risk” inquiry is fact-specific. Beyond the examples that can be culled from the cases discussed in the Fourth Circuit’s opinion, there is a broader question of when a data breach causes injury in real life, and what evidence a plaintiff can present to substantiate that injury.

    Beck Examples

    Standing Probably No Standing Maybe Standing
    There is evidence of actual misuse or access to the personal information by the “data thief” (e.g., fraudulent charges on a credit card, or attempts to open a fraudulent account using a stolen social security number).

    The data breach occurred 3-4 years ago, and no harm has occurred as a result.

    The item that was stolen could have been stolen for reasons other than the sensitive data it contained.

    The increased likelihood of becoming a victim of identity theft due to the data breach is 33% or lower.

    The entity that held the sensitive information has offered to provide free credit monitoring. There is evidence that the “data thief” intentionally targeted the personal information compromised in a data breach.

     There is evidence that the "data thief" intentionally targeted the personal information compromised in a data breach.

    For example, HAVE I BEEN PWNED? (www.haveibeenpwned.com) is a website that aggregates personal account data that has been illegally accessed and then released into the public domain. By simply entering an email address or username, a visitor can know whether that account has been associated with a known breach, and what data was exposed in that breach, including names, genders, dates of birth, physical addresses, email addresses, usernames, passwords, password hints, security questions and answers, IP addresses, credit card numbers, and phone numbers.

    If an individual’s data is picked up by the website, it is very likely that the “data thief” intentionally targeted that sensitive data in the attack—a fact that “sufficed to push the threatened injury of future identity theft beyond the speculative to the sufficiently imminent” in Galaria, Remijas, and Pisciotta. Id. at 274. Yet, if a plaintiff’s information is on the website, but there is no evidence of actual misuse, and the breach happened several years ago, it seems unlikely that the Fourth Circuit would find an injury in fact.

    It is possible that reputational injury could suffice to show injury in fact. HAVE I BEEN PWNED? contains a subset of data relating to “sensitive breaches (such breaches are considered “sensitive” in that someone’s presence on the website may adversely impact them if that information became public). Ashley Madison, an online dating service marketed to people who are married or in committed relationships, is considered one of these “sensitive” websites. Even if the Ashley Madison breach had happened five years ago, and there was no evidence of actual misuse of private information, the reputational and marital injury caused by the mere revelation of membership could potentially constitute an injury in fact.

    As a final hypothetical, imagine that the compromised information consists of an email address, a hashed password, and a password hint. The potential for injury in such a case is magnified by the fact that individuals tend to use the same email address and the same or similar password across many sites. Indeed, a common method of gaining unauthorized access to an online account is called a “brute-force attack,” where an attacker tries many different passwords until the correct password is found. The number of guesses needed in a brute-force attack is greatly reduced if the attacker has a hint, or the hash used to obscure the actual password is not very strong. If the hypothetical owner of the compromised information can prove that there were multiple login attempts on websites where he/she uses the same email address (an indication of a brute-force attack), would that be enough evidence of actual misuse? Like the plaintiffs in Beck, we will have to wait and see what happens.

    This article originally appeared in Volume 7, Issue 1 – May 2017 of "The Middle Ground", the publication of the Federal Bar Association - Middle District of North Carolina Chapter. Reprinted with authors permission.

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  • 28 Apr 2017 9:05 AM | Lynette Pitt (Administrator)

    by William Silverman, Wall Templeton & Haldrup, PA

    Effective risk transfer in the construction industry is critical. So when an opinion comes out broadening that horizon, practitioners should take note. A recent federal court decision in an additional-insured coverage action opens a new door in North Carolina for construction risk transfer by holding that the construction parties’ contract trumps the language of the insurance policies to determine priority of coverage.

    Continental Casualty Company v. Amerisure Insurance Company1 arose from a dispute about coverage under a sub-subcontractor’s CGL and umbrella policies for serious personal injuries sustained during a construction project in Charlotte. The general contractor on the project, KBR Building Group, LLC (“KBR”), entered into a subcontract with SteelFab, Inc. (“SteelFab”) to supply and erect the structural steel for the project. SteelFab then subcontracted with Carolina Steel and Stone, Inc. (“CSS”) for the erection of structural steel. During the project, an employee of CSS fell from steel decking and suffered serious injuries.

    Under the policy chain for the project, KBR was an additional insured on SteelFab’s CGL policy with Continental Casualty. SteelFab and KBR also were additional insured on CSS’s umbrella and CGL policies with Amerisure. When the injured employee filed suit, the risk transfer line dance kicked into gear. KBR tendered its defense to SteelFab’s carrier, Continental Casualty. Continental Casualty in turn tendered to CSS’s carrier, Amerisure.

    Amerisure admitted that SteelFab and KBR qualified as additional insured under the CSS policy, but noted the owner on the project in question had an owner controlled insurance program (“OCIP”) in place. Amerisure’s policy contained an exclusion for damages arising out of the named insured’s operations when included in an OCIP2. Amerisure thus determined that coverage was excluded and, accordingly, denied that it had any duty to defend SteelFab or KBR.

    Continental Casualty stepped in to defend KBR and SteelFab in the personal injury suit upon Amerisure’s denial, incurring more than $650,000 in defense costs, and resolving the case for $1.7 million. As part of the settlement agreement, Continental Casualty preserved its rights to pursue indemnification and/or contribution from Amerisure, and filed a declaratory judgment action to establish that:

    - Amerisure owed a duty to defend SteelFab and KBR in the personal injury suit;

    - the Amerisure policies applied on a primary and non-contributory basis; and

    - Continental Casualty was entitled to reimbursement of all defense costs and expenses incurred in connection with the personal injury suit (i.e., equitable subrogation).

    Both Continental Casualty and Amerisure eventually filed cross-motions for summary judgment in the declaratory judgment action on all issues. Judge Graham Mullen presided over these motions and ruled as follows:

    1. Duty to Defend

    There was no real dispute that Amerisure’s duty to defend SteelFab and KBR was triggered in the personal injury suit. Amerisure admitted that SteelFab and KBR were additional insured under the CSS policies, and the complaint in that suit alleged damages because of personal injury caused by an occurrence. Nonetheless, Amerisure argued that the plain language of the OCIP Exclusion (i.e., bodily injury arising out of CSS’s operations included in an OCIP) applied to exclude coverage.

    The fallacy in Amerisure’s position, however, was that CSS was not enrolled in the OCIP on the project – a fact of which Amerisure was aware when it denied a defense to SteelFab and KBR. There was inarguably an OCIP in place on the project, and CSS was eligible to be enrolled in the OCIP. Amerisure contended that the OCIP exclusion should apply to bar its duty to defend because its named insured (CSS) was eligible to be enrolled and should have been enrolled in the OCIP.

    In his opinion, Judge Mullen conceded that there may be an issue of fact as to whether CSS was eligible to be enrolled and should have been enrolled in the OCIP, but nevertheless rejected Amerisure’s position. He noted that when determining whether an insurer has a duty to defend in North Carolina, the insurer must accept as true all allegations in the complaint, and also must consider reasonably available facts outside the four corners of the pleading that could be covered by its policy3. An insurer, however, may not consider extrinsic facts to defeat a duty to defend4. The complaint in the personal injury suit made no mention of insurance, much less any OCIP in place on the project. Judge Mullen thus held that Amerisure breached its duty to defend SteelFab and KBR because Amerisure could not establish an element of its OCIP Exclusion (that CSS’s operations were included in an OCIP) based solely on the allegations of the personal injury complaint and could not otherwise rely on facts outside the pleadings to establish the application of an exclusion5.

    2. Priority of Coverage

    Since coverage was established6 and the amount of the personal injury settlement was more than either of the CGL policy’s limits standing alone, the next issue was the order of coverage – which policies were primary and which were excess. In a novel ruling under North Carolina law, Judge Mullen determined that the contract between CSS and SteelFab governed the priority of coverage, not the language of the insurance policies themselves.

    Amerisure argued that even if its policies did provide coverage, that its primary coverage was limited to $1,000,000 (the limits of its CGL policy) and that its umbrella policy was excess over Continental Casualty’s primary policy. In other words, Amerisure’s proferred coverage sequence was: (1) Amerisure CGL ($1M limits); (2) Continental Casualty CGL ($1M limits); then (3) Amerisure umbrella. Conversely, Continental Casualty argued that all of Amerisure’s coverage should be primary, and that its coverage should sit excess to the combined limits from Amerisure’s CGL and umbrella policies.

    Judge Mullen first looked at the subcontract between SteelFab and CSS before turning to the policies’ language. The subcontract required CSS to procure both CGL and umbrella insurance with $1,000,000 limits each. The subcontract included an express requirement that CSS would provide insurance that was primary and non-contributory to SteelFab’s insurance program. A Certificate of Insurance issued to SteelFab identifying CSS’s coverage with Amerisure also provided that “coverage is written on a primary basis.” The language in the umbrella policy also plainly provided coverage to SteelFab and KBR as additional insured.

    Amerisure argued that the “Other Insurance” provisions in its umbrella policy and Continental Casualty’s CGL policy should govern priority of coverage instead of the subcontract language.7 Amerisure argued these competing clauses made its umbrella excess (only providing coverage after the Continental Casualty CGL policy’s limits were exhausted). Judge Mullen agreed with Amerisure that the language of the “Other Insurance” clauses in the competing policies would make Amerisure’s umbrella policy excess over the Continental Casualty primary policy, but ruled the subcontract language trumped this “Other Insurance” clause analysis to make Continental Casualty’s policy excess.

    Judge Mullen premised his decision on the rationale that SteelFab should be entitled to the benefit of its bargain with CSS. SteelFab contracted for protection in the form of $2,000,000 in primary insurance coverage from CSS before its own insurance would be tapped. Judge Mullen held that, because the SteelFab/CSS subcontract evidenced the intent of the parties, that language dictated the priority of coverage notwithstanding insurance policy language to the contrary.

    Interestingly, Judge Mullen’s determination was not based on any indemnity agreement between CSS and SteelFab8, although the cases cited in support of his decision all include analysis of a contractual indemnity agreement between the insureds as part of the reasoning for shifting the loss to the downstream subcontractor’s insurance carrier.9


    The primary lesson of Continental Casualty v. Amerisure is the importance of careful contract drafting. The explicit risk-transfer terms in the SteelFab/CSS subcontract were central to the end result. The specificity of the insurance requirements created a clear picture of the parties’ intent regarding risk allocation, and Judge Mullen deferred to that arrangement. This decision presents a novel approach to determining priority of coverage in North Carolina, and could create a headache for insurance underwriters given the difficulty in quantifying risk of incurring losses beyond the scope of coverage created by insurance policy language. It will be interesting to see whether the North Carolina state courts follow suit when given the opportunity. Amerisure has appealed this decision to the Fourth Circuit, so an update may be warranted once the appellate process is complete.10

    Continental Casualty v. Amerisure also reinforces the sanctity of the duty to defend in North Carolina. North Carolina courts, both state and federal, jealously guard the insured’s right to a defense from its insurer, and this decision exemplifies that zeal. But Judge Mullen’s decision also reflects the absence of any real deterrent for a carrier to deny coverage to a putative additional insured where that party’s own insurer has agreed to defend. While Amerisure was found to owe indemnity for the settlement and had to reimburse half of the defense costs to Continental Casualty, it would have presumably incurred those losses anyway had it accepted the tender in the first place.11 Other than the loss of control of defense and settlement in the underlying suit, Amerisure’s only penalty here is the imposition of pre-judgment interest. Both this decision and the Rodgers Builders decision from last year may encourage upstream carriers to go to the mattresses on additional insured issues going forward, especially in the Western District.12


    13:14CV529-GCM, --- F. Supp. 3d ---, 2017 WL 34822 (W.D.N.C. Jan. 3, 2017).

    2The actual exclusion read: "This insurance does not apply to 'bodily injury' or 'property damage' arising out of either your ongoing operations were at any time included within the 'products-completed operations hazard' if such operations were at any time included within a 'controlled insurance program' for a construction project which you are or were involved."

    3Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986).

    4Judge Mullen explained: "an insurer may look to facts collateral to the allegations against the policyholder to confirm a defense obligation, but no to negate one." 2017 WL 34822, *5 (emphasis in original) (citing St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1179 (M.D.N.C. 1989), aff'd 919 F.2d 235, 239 (4th Cir. 1990)).

    5See New NGC, Inc. v. Ace Am. Ins. Co., 105 F. Supp. 3d 552, 568 (W.D.N.C. 2015) ("Permitting evidence outside the pleadings to negate allegations in the complaint is akin to a perfunctory review of the merits of the underlying claims against the insured. Such review is not consistent with the duty to defend as understood by the insured party and as explained by North Carolina law pertaining to the interpretation of contracts for insurance.")

    6Because Amerisure breached its duty to defend, Judge Mullen held that it relinquished any coverage defenses and was liable for the costs of defense and settlement paid on behalf of SteelFab and KBS. 2017 WL 34822, *6 (citing Vigilant, 919 F.2d at 240).

    7There is North Carolina authority applying competing "Other Insurance" clauses to determine priority of coverage for an additional insured.  See Universal Ins. Co. v. Burton Farm Dev. Co., LLC, 216 N.C. App. 469, 479, 718 S.E.2d 665, 672 (2011).  The Burton Farm decision, however, was in the context of two competing primary CGL policies. The author is not aware of any North Carolina precedent addressing priority of coverage under facts analogous to this case.

    8Judge Mullen expressly refrained from addressing the impact and enforceability of the indemnity clause in the subcontract because he found the plain language of the subcontract and the umbrella policy shifted the entire loss to Amerisure. 2017 WL 34822, *9 n.5.

    9E.g., St. Paul Fire & Marine Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., 365 F.3d 263 (4th Cir. 2004) (applying Virginia law); Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F. 3d 583 (8th Cir. 2002): Am. Indem. Lloyds v. Travelers Prop. & Cas. Ins. Co., 335 F. 3d 429 (5th Cir. 2003).

    10Continental Casualty has filed a cross-appeal concerning Judge Mullen's ruling (not discussed above in the interest of brevity) that it was only entitled to a pro-rata reimbursement of its defense costs from Amerisure through a contribution claim. Continental Casualty alleged equitable subrogation, and not contribution, for recovery of all defense costs based on the theory that Amerisure's coverage was primary and non-contributory.  Continental Casualty would have no duty to defend until exhaustion of underlying primary coverage if it truly sat excess, so contends it should be entitled to complete reimbursement for defense costs.

    11In dicta, Judge Mullen explains in his decision why Amerisure's proposed interpretation of its OCIP Exclusion supporting its denial would render its coverage meaningless.  2017 WL 34822,*6-*7.  Accordingly, it appears that there would have been coverage under Amerisure's policy(ies) even if it had accepted SteelFab's and KBR's tender and pursued its coverage defenses.

    12See Rodgers Builders, Inc. v. Lexington Ins. Co., No. 3:15CV110-MOC-DSC, 2016 WL 1052623 (W.D.N.C. Mar. 11, 2016), appeal dismissed (Sept. 14, 2016) (finding coverage for general contractor as additional insured under subcontractor's CGL, coverage even where no formal legal claim was asserted by the project owner).

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  • 27 Mar 2017 4:30 PM | Lynette Pitt (Administrator)

    by Michael W. Mitchell & Andrew P. Atkins, Smith Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP

    The Supreme Court of North Carolina recently held that a doctor owed a fiduciary duty to a prospective patient prior to the formation of a doctor-patient relationship. The existence of that duty—previously unrecognized in North Carolina—allowed the Court to invalidate an arbitration agreement in the contract with the patient. The Court’s decision seems to redefine the law of fiduciary duty. And the scope of the Court’s decision necessarily reaches beyond arbitration agreements, and therefore could call into question the enforceability of other types of contract provisions whenever one party alleges the existence of a fiduciary duty.

    In King et al. v. Bryant, et al.1 a patient in need of a medical procedure filled out and executed routine patient intake forms prior to treatment. Among those forms was an agreement to arbitrate any disputes arising out of the doctor’s medical treatment. The forms stated that execution of the arbitration agreement was not a prerequisite to medical treatment. After completing the forms, Mr. King, the patient, and Dr. Bryant, the doctor, formed a doctor-patient relationship. Dr. Bryant then performed the needed medical procedure; however, the procedure did not go well and Mr. King suffered complications and alleged injuries as a result. When Mr. King filed litigation in state court, Dr. Bryant moved to stay the litigation and enforce the arbitration agreement. While there was much procedural history, the primary question before the Supreme Court was whether the arbitration agreement was enforceable against Mr. King.

    Typically, the enforceability of an arbitration agreement turns on an analysis of procedural and substantive “unconscionability.”2 However, here the Court departed from the typical analytical framework, stating “this case hinges upon the nature of the relationship that existed between Mr. King and Dr. Bryant at the time that the arbitration agreement was signed.” Notably, the Court did not focus on whether a doctor-patient relationship existed; rather, the Court looked at whether a fiduciary relationship existed separate and apart from the doctor-patient relationship. The Court held that a relationship of trust and confidence existed between the parties prior to the formation of the doctor-patient relationship, and therefore Dr. Bryant owed a duty to disclose all materials facts to Mr. King before he signed the agreement.

    The Court relied on the fact that Mr. King “demonstrated sufficient trust and confidence in [Dr. Bryant] to provide Dr. Bryant with confidential medical information” before the doctor-patient relationship was formed, even though Mr. King provided that medical information contemporaneously with his execution of the arbitration agreement. Thus, according to the Court, if Dr. Bryant failed to disclose all material facts to Mr. King, and in so doing Dr. Bryant received a benefit from his nondisclosure, then he would have breached his fiduciary duties and committed constructive fraud.

    The Court in fact held that was the case: Dr. Bryant breached his fiduciary duty to Mr. King, and therefore the arbitration agreement was unenforceable. The Court explained that no one directed Mr. King’s attention to the arbitration agreement, which was included in a stack of other documents, or attempted to explain the ramifications to him. While the Court noted that Mr. King never read the documents, it also seemed persuaded by the fact that he had limited education and experience interpreting legal documents.

    The Court further held that Dr. Bryant breached his fiduciary duty for the purpose of obtaining dispute resolution procedures to his benefit. Curiously, the arbitration provision in the agreement did not favor either party to the agreement, and yet the Court did not find this fact to be relevant in the analysis of whether there was a breach of fiduciary duty. If Mr. King had received a benefit of equal value to Dr. King’s, then how could Mr. King have suffered harm that would give rise to a claim that invalidated the arbitration agreement?

    The Court’s holding in King appears to presume, as a general proposition, that a bilateral right to arbitrate is nevertheless a benefit to only one of the parties, in this case the professional. Precedent from the United States Supreme Court, however, disapproves of an analysis that looks at whether one party benefits more than the other from arbitration.

    In Concepcion, the United States Supreme Court considered an arbitration agreement that restricted class actions in arbitration.3 The Court in Concepcion recognized that such a restriction could benefit one party over the other, and the Court referenced arbitration provisions that do not provide for judicially-monitored discovery as another example.4 But the Court did not find unequal benefits to be a proper subject of consideration, even if it falls within the confines of a generally-applicable state law unconscionability analysis, because it simply is not compatible with the Federal Arbitration Act (the “FAA”).5 The primary purpose of the FAA is to “promote arbitration.”6 Accordingly, state law theories that “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA are necessarily preempted.7

    Two justices dissented in King, arguing that the majority had abandoned the Court’s traditional unconscionability analysis, that it had failed to understand how a fiduciary relationship is formed, that it had failed to acknowledge the preemptive effect of the FAA, and that it had mischaracterized arbitration as a benefit to only one of the parties to the agreement. One of the dissents noted that, even if this arbitration agreement favored Dr. Bryant, contracts of adhesion with arbitration agreements often favor one party over the other, and yet they are enforceable under the FAA. The dissent also noted that any contrary analysis necessarily takes issue with the arbitration agreement itself, simply because it is an arbitration agreement. The other dissent even characterized the majority’s opinion as merely a “rationalization” of state law to avoid arbitration. In sum, both dissents take the position that the majority’s state law analysis necessarily applies in a way that would disproportionately affect arbitration agreements and, therefore, such an analysis is preempted by the FAA.

    The Court’s decision raises a significant risk that existing arbitration agreements could be unenforceable. The decision even has implications outside the arbitration setting, because it could just as easily apply to other types of contractual provisions. In fact, the Court expressly stated that its legal analysis would apply to other contractual provisions, not just arbitration agreements. The Court was essentially required to make this holding to avoid the reach of federal preemption under the FAA, which permits invalidation of arbitration agreements only under “generally applicable contract defenses” that also apply outside of the context of arbitration agreements.8

    In situations where a fiduciary relationship could be alleged, parties must now give careful consideration to whether they should adopt additional procedures to ensure that their contractual agreements are properly executed and still enforceable. While this process will be most important in the context of arbitration provisions between professionals and their prospective clients/patients, by necessity the Court’s holding extends equally to other types of contract provisions. The Court offers no guidance as to what provisions, other than arbitration agreements, would reach the threshold of such significance that they must be disclosed and/or explained. The Court also offers no guidance as to how the other party’s level of sophistication or experience should affect the fiduciary’s obligations. Undoubtedly, these issues will be the subject of additional litigation.


    1 __N.C.__, 795 S.E.2d 340 (2017)
    2 See, e.g., Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d 62 (2008)
    3 See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341-42, 131 S.Ct. 1740, 1747-48
    4 Id. at 342-44, 131 S. Ct. at 1747-48
    5 See id.
    6 Id. at 346, 131 S. Ct. at 1749.
    7 Id. at 352, 131 S. Ct. at 1753.
    8 Id. at 349, 131 S. Ct. at 1746.

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  • 29 Jan 2017 3:30 PM | Lynette Pitt (Administrator)

    by Shantia J. Coley, Hedrick Gardner Kincheloe & Garofalo, LLP

    I wish I could say it seemed like just yesterday that was offered and accepted my position at the law firm of Hedrick Gardner Kincheloe and Garofalo. However, the year didn’t just “fly by.” Instead, it inched by in tenths of an hour, slowly and methodically. Do not get me wrong, working at a law firm at some point in their careers is the dream of most young attorneys. I was, and still am, no different. Maybe it’s the millennial in me, but as a person who has governed her life and found success based upon countless checklists, sometimes scribbled haphazardly on the nearest dinner napkin, I almost wish I’d had one as I entered my first year. I’ve been here slightly over a year and now that I am a veteran, (it’s okay to laugh here), I pulled together my very own list of the five tips I wish I had known:

    1. Decorate Your Office Space. While this first tip may seem trivial and a waste of time, your office will become your second home. The four walls of your office will become very familiar to you and you may find that you undoubtedly spend more time there than at your own home. Be kind to this space and make it your own. Grace this area with photos, sports memorabilia, paintings, or whatever it is that you choose to make it a comfortable space to work. Think back to law school and how by the end of your 3L year, you had mastered the art of learning your study habits. You knew exactly where in the school, at your home, or at your local coffee shop was the most comfortable for you. Well you don’t necessarily get to choose your office space, but you do get to make it your own, much like the spaces you were used to. A quick word of caution-- please check with the office managers before you go hammering nails into the walls. I’m sure there are policies and people who can guide and assist you when it comes to deciding how to turn your office into the perfect place to perform your best.

    2. The Other Young Associates Are Your Best Friend. Seriously. You cannot count on the partners to be at your beck and call and to answer every question you have. Simple as that. Ideally, they would have countless expendable hours to dedicate to answering questions and problem solving, but between maintaining client relationships, handling their own work load and firm management, this is just not possible. Chances are that question about interpreting that particular statute has already crossed the mind of another young associate and they have either figured it out or found a seasoned associate to assist. Another important relationship to foster is your relationship with the staff. Remember the office manager who helped you hang your credentials? Or the paralegal who showed you where the restroom was? Well most of them have been there as long as some of the partners and can assist with issues dealing with office procedure, protocol and getting you otherwise adjusted to the firm culture. The partners are certainly important, but do not take these other relationships for granted.

    3.  Save Samples of Everything! So you’ve drafted your first set of discovery or an important motion and sent it to a partner for review. You’ve gotten it returned filled with tracked changes and comments in the margins. You’ve accepted the changes, made revisions based upon the comments and after several hours, it is finally ready to go. Congratulations! Send it out and file a copy away for your own personal reference. By the time next week rolls by and you’ve been distracted by other tasks, you will not remember many of substantive considerations that went into the preparation of this task. You’re still trying to locate the bathrooms at this point anyway. I found it very helpful to keep a small folder of “samples” of various final documents for quick reference. What was the appropriate objection again? What was the language in the Order? What language did this particular partner prefer I use? Well, instead of wasting precious billable hours trying to remember, (trust me that 0.2 will make a difference later), I have found it extremely valuable to just be able to flip through my file to find the answer.

    4. Lunch At Your Desk Is The New Normal. This one took some getting used to. Billing is no fun but it is a necessary evil (as we will discuss next). If you semi enjoy your weekends or evenings, a few sacrifices will need to be made. If you’re a “foodie,” like me, this one may be a bit difficult. Lunch for many is the one trusted time to break up the monotony of the day. However, taking lunch away from my desk each day quickly added up to lost time and later days at the office. Let’s take a minute and do the math. An hour for lunch each day for one month is 20 hours. That computes to 240 hours of potentially billable time each year. I’m not saying never take a lunch away from your desk. In fact, a lunch away once or twice a week is probably necessary for balance. But when the reports come in and you’re faced with trying to figure out where to capture an extra hour or so every day, having a working lunch sure beats trying to bill while watching your favorite football game later in the evening.

    5. Billing Is An Art, Plain and Simple. Finally, billing is not fun and is also not as easy as you may initially think. Figuring out how to bill will probably take more time during your first year than the actual practice of law. Work closely with the partners to master this art. Ask questions of others about what they bill for and what they don’t. You will learn quickly that clients don’t just love paying invoices and will cut time for things they feel are unsubstantiated or unnecessary. I cannot express the importance of learning your clients and learning the style of the partners for whom you are working. It will probably take several months, but you want to invest time on the front end so you can then begin to increase your hours. Do not be ashamed to turn in a “time sheet” each day. I worked closely with a partner and did just this. I have to admit, I cringed when they were returned the next day with comments and edits, but it has paid off and as an added bonus, there is a level of trust that has been developed with that partner and my time entries.

    Well, there you have it. These are without a doubt my five top tips for someone entering their first year at a law firm. You will get tons of advice, but hopefully you will remember some of these tips as well. I’ve experienced a rollercoaster of emotions this past year, however, I can genuinely say that the reward is great. Your new opportunity is not one afforded to all. Hang in there, you got this, and don’t forget to pack a delicious lunch!

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  • 24 Jan 2017 11:00 AM | Lynette Pitt (Administrator)

    by Patrick Cleary, Bowman & Brooke, LLP

    News articles about self-driving vehicles are omnipresent as 2017 begins, suggesting that humans will soon no longer need to worry about driving. If technological and infrastructure advances occur at their predicted pace, automated vehicle technologies will assist, supplant and possibly replace human drivers over the next twenty years. This paradigm shift creates the real promise for dramatically reduced motor vehicle accidents and associated fatalities, injuries and damages.

    But it also creates the real possibility that the plaintiffs' bar will shift their focus from assigning fault to the driver of accident vehicles to the manufacturers of vehicles involved in accidents. In effect, the plaintiffs' bar will argue that the manufacturer of any vehicle equipped with automated driving technologies is liable when said vehicle has an accident. For example, while the National Highway Traffic Safety Administration ("NHTSA") concluded last week that Tesla's Autopilot system did not have a safety-related defect that contributed to a fatal 2016 accident in Florida, it is not a stretch to think that the plaintiffs' bar would make a different argument that vehicles with autopilot systems are "strictly" responsible.(1)

    We expect the plaintiffs' bar to argue that the introduction of automated driving technologies, regardless of form or function, mean that the vehicle itself has the ultimate control over what happens on the roadway. To put it simply, the North Carolina plaintiffs' bar will argue the doctrine of last clear chance will shift from the negligent driver to the motor vehicle manufacturer, opening up new avenues of recovery for injured drivers from their vehicle manufacturer.

    If the plaintiffs' bar prevails, it would be a dramatic shift in North Carolina product liability law, creating a quasi-strict liability regime and a repudiation of contributory negligence outside of legislative enactment. But this argument presents a false dichotomy between automated and non-automated vehicles and ignores well-established doctrines of personal responsibility inherent in North Carolina law.

    This article clarifies the development and introduction of automated vehicle technologies and then evaluates these technologies within the context of North Carolina product liability law. As a defense bar, we have the obligation to rebut plaintiffs' arguments, showing that automated vehicle technologies do not replace the duty of a driver nor do they supplant North Carolina product liability law.

    Development of Automated Vehicle Technologies

    Motor vehicles have not and will not immediately shift from completely human controlled to fully autonomous. Instead, motor vehicles will transition from fully human controlled to human controlled but machine assisted, to machine controlled in certain locations then possibly fully automated. An example of this shift was discussed by Dr. Gill Pratt, Toyota Research Institute CEO at the January 2017 Consumer Electronics Show. (2)

    For a more detailed description of this transition, in September 2016, NHTSA released the Federal Automated Vehicles Policy. (3)  In the Policy, NHTSA differentiates vehicles on "who does what, when" by adopting the SAE Levels of Automation. There are six distinct levels of automation:

    At SAE Level 0, the human driver does everything;

    At SAE Level 1, an automated system on the vehicle can sometimes assist the human driver conduct some parts of the driving task (an example is vehicle equipped with cruise control);

    At SAE Level 2, an automated system on the vehicle can actually conduct some parts of the driving task, while the human continues to monitor the driving environment and performs the rest of the driving task (an example is dynamic cruise control or some types of electronic stability control);

    At SAE Level 3, an automated system can both actually conduct some parts of the driving task and monitor the driving environment in some instances, but the human driver must be ready to take back control when the automated system requests (the Tesla auto-pilot system is at this level);

    At SAE Level 4, an automated system can conduct the driving task and monitor the driving environment, and the human need not take back control, but the automated system can operate only in certain environments and under certain conditions (vehicles at Level 4 could control themselves on dedicated roadways); and

    At SAE Level 5, the automated system can perform all driving tasks, under all conditions that a human driver could perform them.

    There are no commercially available levels for sale at SAE Levels 4 or 5. Indeed, the vast majority of vehicles for sale today are SAE Level 1 or 2 vehicles; vehicle automated driving technologies simply assist the driver. And these technologies have been installed on vehicles for an extended period of time, helping drivers safely control their vehicle on the road. What this means is nothing new. Human drivers have the obligation and responsibility to monitor and control the vehicle – there are no vehicles currently available where the driver can abrogate this responsibility to the vehicle itself.

    North Carolina Product Liability Law and Automated Vehicles

    North Carolina product liability statutes and case law confirm tried and true principles: there is no strict liability in tort, manufacturers must exercise reasonable care in designing and manufacturing their products, product users must exercise reasonable care and contributory negligence is a complete defense to product liability causes of action. N.C. Gen. Stat. §99B-1.1 (“There shall be no strict liability in tort in product liability actions.”); Smith v. Fiber Controls Corp., 300 N.C. 669, 678, 268 S.E.2d 504, 509–10 (1980); N.C. Gen. Stat. §99B-4(3). See also Nicholson v. Am. Safety Util. Corp., 346 N.C. 767, 773, 488 S.E.2d 240, 244 (1997) (noting that the statute “does not create a different rule for products liability actions; it clarifies the common law contributory negligence standard with respect to these actions.”); These tried and true principles provide clear guidance to manufacturers, litigants and the courts when motor vehicle product liability actions occur.

    In particular, contributory negligence limits the ability of injured drivers to recover from a vehicle manufacturer. Unlike in many other jurisdictions, injured North Carolina drivers cannot use the doctrine of strict liability to seek recovery from their vehicle manufacturer. These statutory limitations on recovery are consistent with North Carolina tort and product liability law, and ensure that recovery does not occur when a driver fails to exercise reasonable care.

    As discussed above, the current introduction of automated vehicle technologies does not replace the need for a driver's reasonable care, but assist the driver in exercising that reasonable care. Any other argument misrepresents North Carolina law and the current status of automated vehicle technologies.


    North Carolina's tried and true doctrines of contributory negligence, personal responsibility and reasonable care do not change because of autonomous vehicles and driver assistance technologies. Motor vehicle drivers have the firmly established responsibility to control their vehicles with reasonable care. While automated vehicle technologies will prevent accidents and reduce harm, they do not excuse or replace a driver's non-delegable duty to control their vehicle. The defense bar has an obligation to challenge plaintiffs' attempts to circumvent these tried and true doctrines in motor vehicle accident litigation involving vehicles equipped with automated vehicle technologies.


    (1) https://static.nhtsa.gov/odi/inv/2016/INCLA-PE16007-7876.PDF. Of note, NHTSA classified the Tesla Autopilot as "the Autopilot system is an Advanced Driver Assistance System (ADAS) that requires the continual and full attention of the driver to monitor the traffic environment and be prepared to take action to avoid crashes."

    (2) http://corporatenews.pressroom.toyota.com/releases/2017-ces-press-conference-pratt.htm

    (3) https://www.nhtsa.gov/technology-innovation/automated-vehicles

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  • 23 Jan 2017 2:00 PM | Lynette Pitt (Administrator)

    by Bradley C. Friesen, Bell Davis & Pitt

    In 2016, the North Carolina Court of Appeals issued three opinions that clarify aspects of the attorney-client privilege. They provide helpful refreshers on the basics of attorney-client privilege, as well as guidelines and warnings for how to maintain the privilege during litigation. Additionally, the Federal District Court for the Western District published an opinion about privilege in the context of real estate transactions, which seems to conflict with the view of many real estate practitioners.

    The starting point for discussion of these cases is a review of the elements of attorney-client privilege. The privilege protects attorney-client communications from disclosure, thereby promoting full and frank communications between attorney and client. It arises under the following circumstances: (1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose, although litigation need not be contemplated, and (5) the privilege has not been waived.(1)

    Friday Investments v. Bally Total Fitness: No Joint Defense or Common Interest Protection for Indemnity Relationship Arising from Asset Sale Agreement.

    In Friday Investments, LLC v. Bally Total Fitness of the Mid-Atlantic, Inc.,(2) the Court of Appeals held that communications between indemnitee and indemnitor did not qualify for privilege under the joint defense or common interest doctrine. This doctrine extends the attorney-client privilege to persons outside of the attorney-client relationship when they “(1) share a common interest; (2) agree to exchange information for the purpose of facilitating legal representation of the parties; and (3) the information must otherwise be confidential.”(3)

    This case arose from a lawsuit for back rent under a commercial lease. Friday Investments was the landlord and Bally was the tenant. Before the claims accrued, Bally sold its assets, including its rights under the lease. The asset purchase agreement included the following indemnification provision:

    “[Purchaser agrees to] defend, indemnify, and hold [Bally] … harmless of, from and against any [l]osses incurred … on account of or relating to … any Assumed Liabilities, including those arising from or under the [lease] after closing.”

    After Friday Investments filed suit, the purchaser agreed to provide a defense for Bally under the indemnification provision.

    The plaintiff took the deposition of Bally’s general counsel. During the deposition, the plaintiff’s counsel asked Bally’s general counsel to describe “all of the conversations” after the lawsuit was filed that he personally had with the purchaser—i.e., the entity providing the defense and indemnity for Bally. Attorney-client privilege was asserted. The trial court later granted the plaintiff’s motion to compel the answers, and denied Bally’s motion for a protective order. Bally appealed.

    The Court of Appeals held that the joint defense or common interest extension of the attorney-client privilege was limited to relationships formed primarily for the purpose of indemnification, like an insurance contract, or for coordination among parties in common litigation.(4) The Court held that the asset purchase agreement in this case arose out of a business relationship, and that the indemnity provision was ancillary to the business purposes of the parties. (5) The Court further distinguished the indemnity provision at issue from an insurance contract by noting that it did not allow the indemnitor any right to settle or effect the outcome of the litigation, further emphasizing its business purpose.

    This rationale begs an important question: when would an indemnification provision in an asset purchase agreement be invoked, except in the “non-business” context of litigation? Additionally, while the indemnitor in this case lacked a contractual right to settle the litigation, it was paying for the defense and any ultimate judgment, which would seem to give it a stake in the outcome sufficient to warrant the right to be informed about the shape and strategy for the litigation without having to reveal it to the plaintiff. The North Carolina Supreme Court granted discretionary review for this case on December 8, 2016, so further clarification about this issue is likely.

    Berens v. Berens: A Litigant’s Friend became her Agent to Help with Litigation, thereby Preserving Confidentiality and Privilege.

    Berens v. Berens (6) is a family law case in which the plaintiff-husband subpoenaed communications between the defendant-wife and her friend, who was helping her with the case, as well as communications between the wife’s attorney and the friend. Ordinarily, the presence of a non-client or non-attorney during a communication destroys the confidentiality of the communication, and therefore, the privilege. However, the wife asserted that her friend, although not the wife’s attorney, was her “agent and personal advisor to specifically assist her in this litigation.”(7)

    At the beginning of the friend’s involvement, and before any privilege dispute arose, the defendant and her friend formalized this principal-agent relationship in a written “Confidentiality Agreement and Acknowledgement of Receipt of Privileged Information.” The agreement provided (1) express authority for the friend to act as agent for the wife (2) subject to the wife’s control.(8) The agreement also provided that the friend-agent would “limit her communications concerning the Client’s litigation … to Client and Client’s attorneys and they [sic] will have no communication with anyone including, but not limited to Wife’s experts, accountants, consultants or attorneys or other advisors and consultants unless Client’s attorneys are present.”(9)

    The trial court found that the communications in the presence of the wife’s friend were not privileged because there is “no good friend exception” to the strict elements of attorney-client privilege. However, the Court of Appeals, found that the agency relationship was sufficient to keep the communications within the attorney-client circle. The Court held that being a good friend and being a litigant’s agent are not mutually-exclusive roles.(10) In this case, the record before the trial court and the Court of Appeals contained the friend’s affidavit, describing the agency relationship, as well as a copy of the written agency agreement. The Court of Appeals found these items to be sufficient to establish a client-agent relationship sufficient to preserve the attorney-client privilege.

    Sessions v. Sloane: A Checklist for How to Preserve and Present Privilege Disputes.

    In Sessions v. Sloane,(11) a group of business partners wanted to protect their internal communications from discovery by a creditor. Sloane and his partners won a $50 Million contract with the Royal Canadian Mounted Police to provide three cruise ships to house security forces during the 2010 Winter Olympics in Vancouver.

    A key reason they won the contract was a letter of credit for 10% of the $50 Million bid, which was provided at the last minute by the plaintiff, John Sessions. The defendants agreed to pay plaintiff a fee of $5 Million out of the proceeds of the contract. The proceeds ended up in the trust account for the defendants’ attorney after litigation with the Canadian government. Plaintiff caught wind of a plan by defendants to avoid paying his $5 Million fee, and he sued the defendants and obtained an attachment of the funds in their attorney’s trust account.

    During discovery, in response to a commonly-propounded discovery request for all documents “concerning” the plaintiff, the defendants asserted attorney-client privilege and work product protection. They produced a privilege log identifying some emails among the defendants—no attorneys—from the time period when the defendants were negotiating the terms of the letter of credit agreement with the plaintiff. The plaintiff moved to compel these communications, along with the To, From, CC, BCC, and Subject fields for other emails on the privilege log.

    In response, one of the defendants submitted an affidavit stating that the defendants had hired counsel and planned from day one to deny the enforceability of the agreement with the plaintiff, and therefore, they involved an attorney and anticipated litigation from the beginning. The defendants did not provide the materials at issue to the trial court for in camera review. The parties disputed whether those materials were offered for in camera inspection, but unfortunately, the court reporter present in the court room did not “take down” the proceedings. (PRACTICE POINTER: Expressly request that the hearing be taken down by the court reporter). The trial court ordered the non-attorney communications to be produced, along with the email header information, including email subject lines, for the emails on the privilege log.

    On appeal, the Court of Appeals addressed numerous aspects of privilege, which can be summarized in the following checklist about how to preserve and present privilege disputes:

    • The party asserting privilege has the burden to establish it. Providing a privilege log with only the date, sender, and recipient information, along with a claim of privilege and the basis, “email seeking or containing legal advice,” without providing the documents for in camera review, does not meet the burden because the court lacks sufficient information to evaluate the claim of privilege. (12)
    • Orally offering to allow the judge to review the material at issue is not the equivalent of actually submitting the material for review.(13)
    • If the material was not submitted to the trial court, it will not be reviewed by the Court of Appeals. (14)
    • “The better practice in privilege controversies would be to submit a motion, affidavit, privilege log, request for findings of fact and in camera review together with a sealed record of the documents to be reviewed.”(15)
    • In a matter of first impression, the Court of Appeals held that email subject lines may contain privileged material, but the subject line must meet the elements of attorney-client privilege, and should be submitted for in camera review. “Email containing legal advice” is not a sufficient description to establish privilege.(16)

    In re: Grand Jury Subpoena No. 2013R00691-009: Communications Made to Effectuate Real Estate Transaction are Not Privileged.

    Finally, Judge Whitney issued an opinion in Grand Jury Subpoena No. 2013R00691-009.(17)  In this matter, a law firm was subpoenaed to produce “all documents, records, or files maintained by firm regarding the closing of real estate transactions” between its client and certain parties. The law firm objected to producing confidential communications on the grounds of attorney-client privilege. Judge Whitney issued a published opinion granting the government’s motion to compel, stating that “[b]ecause of the frequent recurrence of objections … the Court now memorializes its oral ruling with this published opinion.”(18)

    The Court ordered the law firm to produce its communications with its client, stating that

    First, the subpoenaed documents are real estate closing files. Second, Movant is admittedly in a position of dual representation. … [E]ither [reason] independently, would suffice to determine that attorney-client privilege does not protect the subpoenaed communications ….(19)

    Perhaps alarmingly, the Court further stated that

    A client communication made for the purpose of effectuating a real estate closing inherently must be made in contemplation of ultimate public disclosure. Therefore, no intention of confidentiality, and thus no privilege exists.(20)

    This decision and rationale conflicts with the way many real estate practitioners view their communications with their clients. While some communications contain information contemplated to be included in the public record, other communications—including details related to negotiations, loan terms, and other matters—are intended to remain confidential. Real estate practitioners should be aware of this published decision.


    The mechanics of attorney-client privilege are often an afterthought during litigation. However, it is important to counsel our clients about privilege at the beginning of the representation so that it is not waived, as well as to avoid creating discoverable non-privileged material in the first place. Finally, remember to create an adequate record for the court to review so that privilege disputes are not waived.


    (1) Sessions v. Sloane, et al., 789S.E.2d 844 (N.C. App. 2016)
    (2) Friday Investments, LLC v. Bally Total Fitness of the Mid-Atl., Inc., 788 S.E.2d 170 (N.C. App. 2016), review allowed, 793 S.E.2nd 685 (N.C. 2016)
    (3) Id., 788 S.E.2d at 177.
    (4) Id., at 178.
    (5) Id.
    (6) Berens v. Berens, 785 S.E.2d 733 (N.C. App. 2016)
    (7) Id., at 739.
    (8) Id., at 736.
    (9) Id., at 737.
    (10) Id., at 741.
    (11) Sessions v. Sloane, et al., 789 S.E.2d 844 (N.C. App. 2016)
    (12) Id., at 856-7.
    (13) Id.
    (14) Id., at 854.
    (15) Id.
    (16) Id., at 856.
    (17) In re: Grand Jury Subpoena No. 2013R00691-009, No. 316MC00079FDWDCK, 2016 WL 4385874 (W.D.N.C. Aug. 16, 2016).
    (18) Id., at 1.
    (19) Id., at 5.
    (20) Id.

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  • 14 Dec 2016 11:30 AM | Lynette Pitt (Administrator)

    by Shannon J. Colangelo, Queen City Court Reporting

    In the past decade, the practice of insurance companies contracting for services has changed the court reporting industry, but for better or worse? Who is this practice benefiting, the local court reporting firm or the insurance industry? This practice has been the subject of much debate over the years as to whether these contracts bias the court reporting firms providing the service. In February of this year, California became the latest state to pass a law imposing disclosure requirements similar to those in North Carolina, while over half the states in the U.S. prohibit these contracts completely.

    N.C. Gen. Stat. § 1A-28(c)(4) addresses the rise in the use of exclusive or preferential contracts between providers of deposition services being financed by insurance companies, in efforts to ensure fairness and prevent cost-shifting. Such arrangements, while frustrating for small court reporting firms and counsel on opposite sides of such litigation, have thus far not been prohibited in North Carolina. The vexation created by these contracts is felt predominantly by attorneys paying for “outrageous” copies, as evidenced in a recent suit, Crystal Danielson vs. Veritext Corporate Services, Inc., filed by attorney Lamar Armstrong. Although the Court ruled against Mr. Armstrong’s client in this case, his plight is felt throughout the industry. Judge Robinson noted, “Nor does Danielson allege that she, or her counsel, made any efforts prior to the deposition to determine who would be serving as the certified verbatim reporter at the deposition or how much a copy of the deposition would cost.” As an aside, most court reporting firms cannot tell you how much a transcript is going to cost prior to the deposition, as prices are dictated by page count. The best they could have done was disclose their copy page rate.

    N.C.G.S. 1A-28(c)(4) also requires “the party desiring to take the deposition under a stipulation shall disclose the disqualification in writing in a Rule 30(b) notice of deposition and shall inform all parties to the litigation on the record of the existence of the disqualification under this rule and of the proposed stipulation waiving the disqualification. Any party opposing the proposed stipulation as provided in the notice of deposition shall give timely written notice of his or her opposition to all parties.”

    This business shift allowing insurance clients to dictate which reporting firm to hire has hurt independent reporters and local reporting firms and benefitted national reporting firms and the insurance industry. National reporting firms, most of which are not located in North Carolina and do not benefit our economy in the same way local reporting firms do, contract with insurance companies to provide lower original rates to their client and charge higher than average page rates to the copy attorneys, while paying lower than average page rates to the court reporters who provide the actual service to the client, all in efforts to cover their exorbitant overhead. This shift in business has affected closure of many small firms in recent years due to their clients being herded to the national firms by insurance litigation. Small court reporting firms across our state, as well as throughout the U.S., are still trying to survive this industry shift. In an if-you-can’t-beat-them-join-them mentality, some local reporting firms have petitioned these national agencies, requesting to be placed on their list of approved firms, if only to handle the depositions of their own clients, most times being thwarted in the attempt unless the attorney goes to battle with the insurance company on their behalf.

    In a May 2016 Lawyers Weekly article, Lawyer challenges court reporters on ‘outrageous’ copy charges, Phillip Bantz interviewed Mr. Armstrong, the attorney who filed the suit against Veritext. The article quotes Armstrong to have “believed that court reporters are using copy charges as an ‘extra profit center’ but he said he’s been told that reporters have to make money off the copies based on how they price the originals...the answer is to set your originals at whatever cost you need to generate the profits you want.” In theory, this is a plausible answer, but would necessitate an industry-wide pricing model change. If one agency raised the prices of original transcripts to cover the expenses that copy sales now cover, that agency would not be competitively priced within the industry and would soon find themselves out of business. Another way to keep costs down is to use a local firm with a smaller overhead and plan the deposition with enough time to receive transcripts at standard, not expedited, page rates.

    This problem has been ongoing for more than a decade. Consumer Watchdog discussed the issue in 1999. One attorney they quoted had complaints that mirror the concerns of court reporters across the nation, “When a client learns that the court-reporting firm is financially tethered to the insurance company, he feels that maybe he's not getting the transcript he deserves,” Says Gallen. “One thing we could always count on in the past was the integrity of the court reporter. I could always make that assurance to my client. But now I can't vouch for something I don't know.” They also point out that “many defense lawyers hate being told which court reporter they can use for a particular case. They'd rather pick the best one for the job.” The same holds true today.

    When asked, “How does contracting affect impartiality? Aren’t ethical codes enough?”, the National Court Reporting Association’s answer is that “Any arrangement that threatens the impartiality of court reporters or merely threatens the appearance of impartiality will lead to a breakdown of our justice system. What if the judge in a case of yours was being paid by your opponent in the litigation? Would their oath to be impartial be enough for you? If you lost, would you feel as though you got a fair shake? It is our faith in the impartiality of the judicial system that is the very basis of our Rule of Law and ordered government, and this foundation erodes when the antagonists in litigation--the parties--start directly paying the bills of the allegedly impartial.”

    The national agencies keep growing year after year and acquiring more smaller firms in every state and, left unchecked, will eliminate the small reporting firms all together in not too many years. If you’re paying too much for copies now, beware. The monopoly that is growing certainly will not keep prices down in the future.

    About the Author: Shannon Colangelo has been a court reporter for 10 years, partnering with three colleagues in March, 2015, to form Queen City Court Reporting. She spent the 20 years prior as an executive assistant and is a Gulf War veteran, U.S. Air Force. Queen City Court Reporting, based in Charlotte, with over 50 years combined experience, serves primarily North and South Carolina, as well as the Southeastern U.S. We pride ourselves on our professionalism, accuracy, and timeliness in every job we take, striving to get to know our clients so we can tailor each job to fit their individual needs.

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  • 30 Nov 2016 3:05 PM | Lynette Pitt (Administrator)

    by Niki T. Ingram, Marshall Dennehey Warner Coleman & Goggin

    "Black lives matter," "equality for women," and "diversity and inclusion" are all phrases that are thrown about in today's world. These phrases mean different things to different people, and one can argue that they refer to moral conclusions that some individual or groups espouse. They are generally not phrases that come to mind when talking to the insurance industry, but perhaps they need to be. It is important for insurance carriers, and those who represent them, to realize that the world is a very diverse place and that the appreciation of these differences can be critical when evaluating cases.

    Proper reserving is one of the most important aspects of working in the insurance industry. Carriers set their premiums based upon algorithms used by underwriters when issuing policies. Those algorithms take into account the likelihood of a claim occurring. Insurance companies are obviously in the business of making money when writing insurance, and, from the inception of a claim until its conclusion, it is critical that the reserves are adequate. Once a claim does occur, the initial reserve is set by the insurance adjuster. The setting of the reserves is based upon the most accurate assessment of the case that is possible. Reserves, however, are fluid and should change as the case evolves. Should the case go into litigation, the attorney representing the defendant then becomes involved in the valuation process. It is essential that the adjuster and the defense attorney be as accurate as possible when evaluating cases and that all factors involved in the case are appropriately assessed. One way to assure that this happens is to make certain that neither the claims professional nor the defense attorney allows his or her unconscious biases to impact the valuation of the case.

    Unconscious biases are those prejudices we all have that impact our belief structure about other groups. These biases may be based on race, gender, ethnicity, age, disability status, personality type or some other factor. They don't necessarily all exist together, but we all manifest them in some way or another. In the context of this article, the biases that are being discussed are those of racial prejudice.

    Several years ago, I had a case where I was asked to provide a settlement analysis for my client, which was a large third-party administrator. I went through the standard process of evaluating the case and considered the age of the plaintiff and her life expectancy, as well as the extent of her injury, the permanency of that injury, the cost of her medical treatment, what future treatment she would need, her ability to work, her loss of earnings and her level of pain and suffering. My settlement recommendation was neither high, nor low, from my perspective. However, the client dismissed my analysis immediately. What was interesting was that the dismissal was done using terms that could be classified as "buzz phrases," such as "people like her don't need that kind of money" and "she's just not a quality human being. I don't want her to get a large settlement. Let's make her sweat it out." What was the plaintiff like? Where did she live? What made her not a quality human being? I'm not sure of all of the answers to these questions, but she was a middle-aged African-American woman who lived in a working class neighborhood that was primarily African-American and Latino. She had an Associate's degree and had been working for a number of years when she sustained her injury. There was nothing to outwardly suggest that she was not "a quality human being." The claims adjuster refused to settle the case, and it dragged on for another year.

    The result of the failure to settle this case early was that by the time it did settle, my client paid $50,000 more than the original settlement recommendation. This case has always resonated with me because it is emblematic of the many reasons why diversity and inclusion should be important to the insurance industry. Was the adjuster in this case a racist? Probably not. Did his unconscious biases about African-Americans impact the value that he placed on the case? Probably. There are many studies that show that affinity biases exist. These biases are those which make us inclined to like or value individuals who are most like ourselves. In recent years, many studies have been conducted on unconscious biases, and one study done in 2014 showed that, even when people believe that prejudice and discrimination are wrong, they still harbor these biases. (Henneman, 2014). There are a myriad of unconscious biases that exist, and it is important for the defense industry to understand that hiring and retaining diverse personnel helps to reduce the biases of others in the office and that this, along with formalizing training about issues of diversity, leads to increased understanding and respect for individuals who are different than the evaluator.

    The initial response from the insurance industry and the defense bar about a case such as my example above may be that this was an individual instance and there was no demonstrated racism. Perhaps a more thoughtful and realistic way to deal with the issues posed might be to focus on the fact that the case could have settled more quickly and more cheaply had the adjuster been able to recognize and appreciate the value of a non-white life. Even if minorities are not well represented in either the insurance industry or the defense bar, there can be training conducted that helps individuals to understand what their unconscious biases are and how to overcome them or compensate for them. While there is certainly a moral argument that the hiring and retention of minorities is important for the defense industry, there is also an economic incentive to implement and strengthen diversity programs and practices.

    All cases need to be evaluated as accurately as possible. This starts with the first-line adjuster. These adjusters need to recognize and overcome any inherent biases they have. As a case proceeds into the litigation process, it is incumbent upon defense counsel to do the same. The recognition that unconscious biases may play into analysis will not only help improve accuracies in setting reserves and settlements, but it is the beginning of change for the industry as a whole.

    About the Author: Niki T. Ingram is a Shareholder, Director of the Workers' Compensation Department, and a member of the Board of Directors at Marshall Dennehey Warner Coleman & Goggin. 

    This article is re-printed with permission from DRI’s Diversity Insider Newsletter, May 6, 2016 issue.

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  • 16 Nov 2016 11:21 AM | Lynette Pitt (Administrator)

    by Erin M. Young, Hall Booth Smith, PC

    A recent Order and Opinion from the North Carolina Business Court establishes that corporate in-house counsel in this state can no longer rely on the mere fact that they are attorneys as a shield from becoming testifying witnesses in litigation. The Court determined that, under the circumstances, a blanket order prohibiting plaintiff from deposing in-house counsel was not justified and the deposition could proceed. In the November 2, 2016 Order and Opinion, Chief Business Court Judge James Gale denied a Motion for Protective Order filed by Acuity Healthcare Holdings, Inc. and Acuity Healthcare, L.P. ("Acuity") in response to plaintiff's request to depose their general counsel and vice president of compliance and risk management.


    Plaintiff, Carmita Edison, worked as a respiratory therapist at Mercy Restorative Hospital ("Mercy"), a long-term acute care hospital in Charlotte. Acuity and Mercy jointly employed the plaintiff. Plaintiff alleges that Acuity and Mercy wrongfully terminated her after she filed a complaint with the North Carolina Respiratory care Board regarding poor patient care, incorrect ventilator settings, false documentation, and management failures.

    Plaintiff's attorney requested to depose Acuity's general counsel. Acuity, in its Motion for Protective Order, stated that their general counsel provided "general legal advice and counsel to [Acuity] . . . regarding legal compliance and management of legal risk." Acuity's 30(b)(6) designee also identified the general counsel as the person capable of answering questions on topics relevant to the dispute about which the designee had no knowledge.

    Plaintiff then served a notice of deposition on Acuity's general counsel to which Acuity responded with a Motion for Protective Order.

    Legal Analysis

    The Business Court adopted the "Shelton" rule set forth in the Eighth Circuit decision of Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir.1986 ). A party may depose corporate in-house counsel if they are able to demonstrate that "(1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case."

    In its discretion, the Business Court found that under the Shelton analysis, Acuity's general counsel could be deposed because the deposition was not targeted solely at eliciting information relating to Acuity's litigation strategy, and the deposition would not necessarily result in undue burden or expense. The Court further determined that there was no evidence that counsel had been substantially involved with overseeing the litigation. Additionally, the 30(b)(6) designee identified in-house counsel as the person who could best speak to certain clinical care standards and to consistency among Acuity's hospitals.


    Where defendant's general counsel also served as one of its vice presidents who may have unprivileged knowledge relevant to the case, she may be deposed. The Business Court stated that a blanket order prohibiting general counsel's testimony was unjustified; that Acuity could assert the attorney-client privilege on a question-by-question or subject-by-subject basis.

    Future Implications

    Neither North Carolina's appellate courts nor the Fourth Circuit have expressly adopted the Shelton rule. However, federal district courts in North Carolina have applied the rule in some cases. The Business Court's adoption of the rule certainly has persuasive implications for other trial courts considering this inquiry. The trend now seems to be that court's will not issue a blanket prohibition on the in-house deposition but will entertain a motion to limit the scope of the deposition.

    Though the ruling in this case sounds ominous, you must remember that Acuity's general counsel served in dual capacities – both as general counsel and as vice president of the company's compliance and risk management department. In that regard, she possessed non-privileged, relevant, factual information necessitating her participation in the litigation as a fact witness.

    To reduce the possibility of general counsel becoming a deponent, corporations and their in-house counsel can take some proactive measures to reduce the chances of being deposed or to limit the scope of the deposition.

    • Do not allow the in-house attorney to act like a fact witness. For example, corporate counsel should avoid signing affidavits or interrogatories as the corporate representative if possible. Participation in factual discovery erodes the line between counsel and fact witness.
    • Delineate those written communications that are made solely for the purpose of giving legal advice. Routine business communications do not become privileged solely because they are sent to or copied to in-house counsel. Clearly, identify all written communications seeking or providing legal advice as "confidential" and/or subject to the attorney-client privilege in the event of a request for production or in camera review. Also, only disseminate communications with legal advice to those who have a legitimate "need to know." Have non-legal employees identify communications to in-house counsel as a "request for legal advice."
    • If general counsel serves a dual role, avoid discussing legal and business topics in the same communication or forum. Where the in-house counsel wears both a legal hat and a business hat, that automatically increases the likelihood that he/she possesses non-privileged information. Thus, the dual roles should be clearly delineated as much as possible to protect the attorney-client privilege.

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