Change in How SC Supreme Court Views Conspiracy Claims May be Coming

by McNair Law Firm, P.A.
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As our various courts decide cases, we watch to see if there are any trends that seem to be developing or whether a case signals that the courts are beginning to change how they view a particular issue or type of case. We've pointed out over the past several years that the U.S. 4th Circuit Court of Appeals (whose rulings apply to all South Carolina employers) has been evolving from a court that pundits identified as conservative to one that is now trending liberal, at least in employment cases.

We've also watched the South Carolina Supreme Court as longtime Chief Justice Jean Toal wound down her tenure and retired in December 2015, and her successor, current Chief Justice Costa Pleicones, also a longtime member of the court, moves toward his own retirement in December 2016. A recent decision from the supreme court may be sending a signal that it will approach certain types of cases differently, which is a development the business community should be aware of.

Background

After working in the professional employer organization (PEO) industry for several years, Mary Etta McCarthy decided to develop a PEO of her own. PEOs provide HR, employee benefits, payroll, and workers' compensation services to businesses that want to outsource that area of management. In the summer of 1997, McCarthy began looking for a partner with HR experience to join her in the endeavor. She eventually entered into a partnership agreement to form Allegro with Emmett Scully.

Under their agreement, Scully would ultimately own 49 shares of the partnership, and McCarthy would have 51. Scully acted as Allegro's president, supervising its day-to-day operations, working with employees, and keeping up client relationships.

During his time at Allegro, Scully became acquainted with George Corbin, who performed outside accounting and CPA services for the company. Corbin kept the books and performed Allegro's annual audits for two or three years.

Scully and McCarthy's relationship eventually soured, and Scully began considering different options to sever his ties with McCarthy. He discussed his plans with Corbin. To aid in Scully's decision making, Corbin drafted a letter identifying Scully's options—buying out McCarthy, selling his shares to her, or starting a new company. In the spring of 2003, Scully informed McCarthy that he wanted to run Allegro on his own and would like to buy out her shares.

After almost a year of being unable to reach an agreement over the price of the shares, Scully tendered his resignation. During this period, he let key customers know that he might be leaving Allegro if he couldn't buy McCarthy out. Also during this time, he made certain that he secured critical client information, company forms, and other Allegro information off-site in case he wasn't successful in getting McCarthy to sell.

McCarthy initially indicated that she would accept Scully's offer to purchase her shares instead of accepting his resignation, but after some thought, she changed her mind. When Scully returned from a business trip, McCarthy met him at the office with a letter accepting his resignation and immediately requested the keys to the company car and the return of any company property. She had the police waiting in an adjacent room in case trouble occurred, and she ordered a cab to take Scully home. She found copies of many Allegro documents and customers' financial information in the company car.

Over the course of the following week, Scully visited Allegro's customers. The first customer of Synergetic, the PEO he established, was the company Corbin worked for. Before resigning to join Scully's new company, Yvonne Yarborough, an Allegro employee, downloaded certain Allegro information and sent it to her personal computer.

Ultimately, she and Lisa Milliken, another Allegro employee, joined Scully at Synergetic.

Procedural background

In April 2004, Allegro filed suit against Synergetic, Scully, Corbin, and Yarborough, alleging 13 causes of action:

  • Breach of the duty of loyalty against Scully and Yarborough;
  • Scully's statutory violation of his duties as an officer of the company;
  • Breach of fiduciary duty against Scully;
  • Breach of contract accompanied by a fraudulent act against Scully;
  • Breach of contract against Scully;
  • Fraud against Scully;
  • Gross negligence against Scully;
  • Negligent misrepresentation against Scully;
  • Scully's violation of a statutory conflict of interest by a company officer; and
  • Civil conspiracy against Scully, Corbin, and Yarborough.

Allegro also filed a motion for a temporary injunction to bar Synergetic, Scully, and Yarborough from soliciting any of its clients. The injunction was granted in a thorough 10-page order. The case proceeded to trial, and it was tried before a jury in May 2006.

The jury returned a verdict in favor of Allegro on all of the claims, awarding $160,000 in actual damages on each claim. The jury also awarded Allegro $75,000 in punitive damages on the claim for breach of loyalty against Yarborough and $175,000 in punitive damages for the civil conspiracy claim, for a total of $1.76 million in actual damages and $250,000 in punitive damages. Since then, the case has been bogged down in posttrial motions and appeals.

Scully, Yarborough, and Corbin disagreed with the jury verdict and asked the court for judgment notwithstanding the verdict (JNOV). The trial court denied their request in an order dated July 9, 2008, basing many of its conclusions on their failure to preserve their complaints by objections during the trial. Specifically, the trial court found their arguments for JNOV were not preserved on the claims for breach of the duty of loyalty against Scully and Yarborough, breach of the duty of good faith against Scully, breach of fiduciary duty against Scully, and conflict of interest against Scully because those issues hadn't been challenged at an earlier stage in the proceedings.

Addressing the remaining claims, the trial court held that the limited basis on which the breach of contract claim had been challenged was whether there was any evidence that a contract existed, not whether Allegro failed to prove the terms of the contract. The court concluded there was sufficient evidence for Allegro to overcome a JNOV motion on the breach of contract claim.

On the breach of contract accompanied by a fraudulent act claim, the trial court found that Scully had never alleged there was no evidence of a fraudulent act, so he was precluded from doing so at the JNOV stage. Likewise, on the civil conspiracy claim, Scully, Yarborough, and Corbin failed to argue a lack of evidence of special damages in their directed verdict motion and therefore couldn't argue those grounds for the JNOV motion.

The trial court also denied their motions for a new trial, which were premised in part on alleged evidentiary issues, holding it wasn't error to allow the jury to hear evidence about the temporary injunction. With regard to the assertions that the verdict was inconsistent or that Allegro was required to elect a remedy, the court concluded that there was no double recovery and Scully, Yarborough, and Corbin's failure to object to the verdict form meant they waived a potential claim that recovery for any of the claims was premised on the same conduct.

On the initial appeal, the court of appeals reversed and sent the case back to the lower court, holding it erred by allowing the temporary injunction into evidence. The court declined to rule on Scully, Yarborough, and Corbin's challenges to the denial of their JNOV motions. Both parties asked the supreme court to review the ruling. The court rejected Allegro's petition, granted the former employees' petition, and sent the case back to the court of appeals for consideration of the JNOV issues. On reconsideration, the court of appeals held the trial court erred in failing to overrule the jury's verdict on the claims of fraud and negligent misrepresentation.

In addressing the claims for breach of contract and breach of contract accompanied by a fraudulent act, the court of appeals declined to address Scully, Yarborough, and Corbin's argument that Allegro failed to prove any terms of the contract. Instead, it limited its review to whether Allegro presented evidence that a contract existed. Finding sufficient evidence to overcome the challenge, the court ruled there was no error in the denial of JNOV.

Turning to the conspiracy claim, the court of appeals concluded that Scully, Yarborough, and Corbin hadn't preserved their argument for appeal, and there was no evidence of special damages. The court considered only whether there was evidence of Corbin's intent to cause harm. Finding that such evidence existed, the court ruled the trial court didn't err in denying JNOV on that basis.

Both parties asked the court of appeals for a rehearing, which was denied. Scully, Yarborough, and Corbin then asked the South Carolina Supreme Court to review the case.

Court's analysis

From a strictly legal point of view, the court's holding that the breach of contract and breach of contract accompanied by a fraudulent act claims should be dismissed indicates that it thought no reasonable jury could have believed the evidence before it. Interestingly, some claims are now going back to the trial court. It should be noted that Justice Pleicones wrote a dissent in which he pointed out that an oral contract or a contract by conduct was before the jury and the majority erred in deciding otherwise.

The majority also held that there was no evidence that a reasonable jury could have believed, based on the evidence before it, that a conspiracy had taken place. The dissent signaled that one of the elements of a conspiracy case, "special damages," is contrary to South Carolina's general law on damages, and normal damages standards should apply. The majority wasn't inclined to agree with that position based on the age of the case. (The lawsuit was filed more than 12 years ago and tried before a jury more than 10 years ago.)

Lessons for employers

The changing of the guard at the South Carolina Supreme Court appears to indicate that certain shifts may be coming. The court is signaling that in the future, it may be easier to allege conspiracy claims in the employment context. If special damages are removed from the elements of a conspiracy claim, that would allow a plaintiff to allege the same damages as in other claims and make it easier for conspiracy claims to get to a jury. As a result, businesses should expect to be hit, in almost every employment case, with a conspiracy claim.

With regard to breach of contract claims, the court's decision, at a minimum, implies that oral contracts or contracts created by conduct may no longer be a basis for viable claims. The decision is a mixed bag for employers. It will be worth watching to see what happens with future decisions as two new justices become part of the court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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