Joseph D. Hammond

Christopher Rhodes Jr.

North Carolina’s courts have been pretty quiet on the topic of class actions since our last North Carolina class action review, but there are two cases that class action attorneys should note. 

In the first, Surgeon v. TKO Shelby, 898 S.E.2d 732 (N.C. 2024), the North Carolina Supreme Court, in the process of vacating an internally inconsistent class certification order, provided guidance to the trial court (and to us class action attorneys and blog readers) about issues to consider (and to raise) at class certification. The second case, JRM, Inc. v. The HJH Cos., Inc., 883 S.E.2d 217 (N.C. App. 2023), from the North Carolina Court of Appeals, highlights the importance of supporting motions to compel arbitration—which are motions class action defendants are wont to bring—with competent, timely evidence. The failure to do so can result in the movant losing out on a right to arbitrate and potentially having its ability to appeal the denial circumscribed. 

Surgeon:  Inconsistencies in class definition doom class certification order, plus helpful hints from the N.C. Supreme Court.   

In Surgeon, plaintiffs sought to certify a class of people who were misled by a car dealership’s promotional flyer. The flyer deceptively suggested, through a scratch-off code, that every recipient had won a grand prize (a Nissan Sentra or $20,000), when in fact the scratch-off code was meaningless. When plaintiffs tried to claim their prize at the dealership, they were informed that a separate activation code printed on the flyer determined the prize, according to which plaintiffs had won the grand prize of . . . $2. Plaintiffs asserted claims for unfair and deceptive trade practices, breach of contract, and negligence, and sought to certify a class of individuals who received and relied upon the flyers. 

The trial court certified the class and defendants appealed the order directly to the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-27(a)(4). The Supreme Court vacated the order based on an inconsistency in the class definition.  While the order defined the class as all individuals who received the promotional flyer and went to the dealership to claim the prize, its analysis and class notice instructions understood the class to consist of individuals who received the flyer, called the hotline number listed on the flyer, and then went to the dealership to claim their prize. The Supreme Court vacated the order and remanded for the trial court to address the inconsistent class definition, reasoning that it “cannot engage in meaningful appellate review of a court order, particularly one that includes a discretionary component, when the court’s ultimate decision on the issue cannot be squared with the reasoning used to reach that decision.” The Court also provided guidance to the trial court concerning issues to consider and resolve upon remand. 

We see three main takeaways from Surgeon:   

The first takeaway: as the N.C. Supreme Court advised the trial court upon remand, keep an eye out for conflicts of interest arising between differently-situated members of the potential class. The Court noted that the breach of contract claim presented a potential conflict because the flyers were ambiguous about the requirements for accepting the prize offer. There was evidence that recipients could claim the prize by simply attending the sales event, but also evidence that recipients needed to call the promotional hotline first. This potential conflict of interest—that class members who did not call could face contract hurdles that other class members would not face—is “precisely the sort of potential conflict of interest that must be examined and resolved” in a class certification order. The Court suggested this potential conflict could necessitate the creation of sub-classes and might preclude class certification altogether. 

The second takeaway:  as the N.C. Supreme Court advised the trial court, consider whether the potential remedies are too insignificant to warrant class certification. The parties in Surgeon differed as to the remedies potentially available, with defendants contending the recovery was limited to the time wasted attempting to claim the prize, and plaintiffs contending they could recover the value of the grand prize itself ($20,000). The Supreme Court counseled that the trial court should examine the potential recoveries available and consider whether some or all of the claims are inappropriate for a class. 

The third takeaway: class action defendants and their attorneys should point out, and pounce upon, inconsistencies in an order certifying a class.   

JRM:  Arbitration motion and appeal doomed by failure to submit timely evidence.

In JRM, Inc. v. The HJH Cos., Inc., 287 N.C. App. 592, 883 S.E.2d 217 (2023), a manufacturer sued its chief financial officer and a vendor for declaratory relief, rescission, and other claims concerning a contract it contended its CFO signed with the vendor without authority.  The vendor moved to compel arbitration under the disputed contract but did not submit evidence of the agreement to arbitrate besides the disputed agreement itself. In response, the manufacturer served two affidavits attesting that it did not enter into the contract and did not agree to arbitrate with the vendor. The vendor then submitted an affidavit to support the disputed agreement, but the trial court struck this affidavit as improperly served and untimely. Because the vendor had not proven the existence of a valid arbitration agreement, the trial court denied the motion to compel arbitration.    

The North Carolina Court of Appeals dismissed the vendor’s appeal. The Court concluded, first, that the trial court did not err when it struck the untimely affidavit and ruled that the vendor had not proven the existence of a valid arbitration agreement. The Court then determined that without a valid arbitration agreement, the order did not affect a substantial right, and therefore the Court lacked jurisdiction to review the order on an interlocutory basis. 

Judge Dillon filed a dissent. Though Judge Dillon agreed with the majority’s analysis of the merits of the appeal, he disagreed with the jurisdictional component. Judge Dillon argued that the majority should not have reached the merits of the appeal in order to determine that the Court lacked appellate jurisdiction. According to Judge Dillon, appellate jurisdiction should be determined instead by the category of order appealed from. Judge Dillon would have affirmed the trial court’s order rather than dismiss the appeal. 

The main takeaway from JRM for class action defendants and attorneys: parties who move to compel arbitration without timely submitting evidence to prove the existence of the arbitration agreement take a serious risk of losing the motion to compel and may, according to the majority in JRM, also lose the ability to appeal the denial. To mitigate this risk, class action defendants and attorneys should submit, along with their motion, the best evidence they have establishing the arbitration agreement.

Having read this post, you are now caught up on the key cases from North Carolina’s courts concerning class actions since our last review, in early 2023.  Stay tuned to this blog for future developments. 

**Ellis & Winters’s Best in Class Blog covers developments in class actions in courts across the United States, focusing on insights for class-action defense.**