When It Comes To PJ, KYC (Know Your Contractor) – Or At Least Where They Are Headquartered.

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Contract with “substantial connection” with NC leads to PJ over a California Defendant who never visited NC.    

In Toshiba Global Commerce Solutions, Inc. v. Smart & Final Stores LLC, 2020 NCBC 95, Judge Conrad held that a California-based company that reached into NC to contract with a NC business was subject to personal jurisdiction.  What makes this decision interesting for PJ purposes is that the California company never travelled to NC or met or dealt directly with anyone in NC.  Instead, it dealt with the NC company’s employees located outside NC.  Nevertheless, the California company was subject to PJ in NC because it twice initiated contact with the NC-based company, and it knew (or should have known) it was dealing with a NC-based company and that work would occur in NC.  As a result, the California company reasonably should have anticipated the possibility of being haled into a NC Court.

Key Takeaways:  Things like who made first contact and whether the contract has a “substantial connection” with NC are key considerations.   As a practical matter, if you reach into NC to contract with a NC entity – especially for work in NC – your contract probably has a “substantial connection” with NC, and you are probably subjecting yourself to PJ of NC Courts.

The parties.  The Plaintiff, Toshiba Global Commerce Solutions, provides point of sale solutions (think bar code scanners at check out) for retail operations, including maintenance and repair services.  Toshiba’s headquarters and certain key operations are in Durham, NC.  The defendant, Smart & Final, is a California company that operates a chain of warehouse-style grocery stories in the western United States – none in NC.

First (and Second) Contact.  In 2017, Smart & Final was looking for a new maintenance company for its point of sale equipment.  One of the vendors it contacted was Toshiba.  The parties signed a non-disclosure agreement – notable, as Judge Conrad put it, because it lists Toshiba’s NC address at the top.  Over the next few months, Toshiba sent Smart & Final pitch materials and a formal proposal.  Those materials also indicated that Toshiba’s HQ was in North Carolina and that aspects of Toshiba’s work would be performed in NC.  Ultimately, Smart & Final hired another company; but that didn’t work out, and Smart & Final soon reached out to Toshiba a second time.

Negotiations lead to a deal.  Negotiations ensued between Smart & Final representatives in California and Toshiba representatives located in California and Texas.  Eventually, a deal was struck.  Of the array of maintenance options that Toshiba offered, Smart & Final chose a plan that involved Smart & Final’s pre-purchase (via Toshiba) of an assortment of repair and replacement parts that Toshiba would warehouse in NC and then dispense to Toshiba field technicians as needed.  As new parts were sent out, old parts were sent back to Toshiba’s facility in NC for repair.  Importantly, other service plans – that Smart & Final did not select – did not involve Toshiba’s pre-purchase, warehousing, and repair of part stock.  Over the course of performance, more than 4,000 parts were shipped from Toshiba’s NC warehouse and more than 2,000 old parts were sent back to Toshiba in NC for repair.

The Deal Goes South.  Less than a year into the initial three-year term, problems arose.  Toshiba claims the repair frequency was higher than predicted, leading to overage fees, which Smart & Final refused to pay.  Ultimately, Smart & Final terminated the contract early. Toshiba then sued in NC, and Smart & Final challenged PJ.

PJ Analysis:

No need to recite long arm statute.  First, Smart & Final argued that Toshiba failed to expressly plead PJ under NC’s long-arm statute, which is not mentioned in Toshiba’s complaint.  Judge Conrad quickly dispatched this argument, explaining that the failure to include a formulaic recitation of the statute is not required.  As long as the underlying facts were in the complaint, the long-arm statute is satisfied.  Here, the complaint included allegations of solicitation of and contract for services to be performed in NC, which satisfied the long-arm statute.

PJ is foreseeable if the contract has “substantial connection” to NC.  “Foreseeability,” Judge Conrad explained, is the “crucial factor.”  The foreseeability test is met when a suit is based on a contract that has a “substantial connection” with the State.   Citing to the NC Supreme Court’s 2020 PJ decision in Beem USA LLLP v. Grax Consulting, which we discuss here, Judge Conrad explained that “substantial connection” is based on several factors including, prior negotiations, future consequences, contract terms, and the parties’ course of dealing.

Assessing dueling affidavits – and reconciling any factual inconsistencies therein – Judge Conrad sided with Toshiba.  To start, Judge Conrad noted that Smart & Final twice contacted Toshiba to solicit services, noting that this was a “critical factor.”  Reaching into NC and soliciting business from a forum resident “tends to show purposeful availment.”

Smart & Final countered that none of the employees involved in the solicitation and contract negotiations was located in NC.  Analogizing the U.S. Supreme Court’s decision we all read in law school –  Burger King v. Rudzewicz, 471 US 462, 475 n.18 (1985) (where the Michigan defendant contacted a Florida company via it’s Michigan district office) – Judge Conrad concluded that it made “little difference” that the Toshiba employees that Smart & Final contacted were located outside NC.  Smart & Final was “well aware” that it was soliciting business from a NC-based entity.  The non-disclosure agreement that preceded negotiations noted Toshiba’s NC headquarters, there are repeated references to NC in the pitch materials and proposal, and the contract itself required formal contract notices be sent to Toshiba’s Durham, NC headquarters.  Finally, as to the parties’ course of dealing (i.e., performance): Judge Conrad explained that Smart & Final selected a maintenance plan that required Toshiba to coordinate all service calls and establish and maintain a part stock, which was work that would take place at Toshiba’s NC headquarters.  As a result, Judge Conrad concluded that the contract had a “substantial connection” with NC and that Smart & Final’s connections with North Carolina related to the contract were sufficient “minimum contacts” to establish personal jurisdiction.

Conclusion: Reaching into NC to contract with a NC-based company for work that will occur in NC will subject a foreign defendant to PJ in NC – even if the defendant never actually comes to the State; so, KYC (know your contractor).

[View source.]

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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