Coles v. Sugarleaf Labs ( 2022 )


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  •                   IN THE COURT OF APPEALS OF NORTH CAROLINA
    2022-NCCOA-707
    No. COA22-116
    Filed 1 November 2022
    Catawba County, No. 20 CVS 2090
    TOD COLES, Plaintiff,
    v.
    SUGARLEAF LABS, INC. (formerly known as Neptune Acquisition USA, Inc.), and
    NEPTUNE WELLNESS SOLUTIONS, INC., Defendants.
    Appeal by Plaintiff from an order entered 17 August 2021 by Judge Gregory
    Hayes in Catawba County Superior Court.         Heard in the Court of Appeals 6
    September 2022.
    Law Offices of Matthew K. Rogers, PLLC, by Matthew K. Rogers, for Plaintiff-
    Appellant.
    Jackson Lewis P.C., by H. Bernard Tisdale, III, and Janean B. Dunn, for
    Defendants-Appellees.
    INMAN, Judge.
    ¶1         Plaintiff-Appellant Tod Coles (“Plaintiff”) appeals from an order compelling
    arbitration and dismissing his complaint with prejudice. The parties dispute whether
    this Court has jurisdiction over this appeal. Orders compelling arbitration are
    interlocutory and are generally not immediately appealable, but a dismissal of a
    complaint with prejudice ordinarily operates as a final judgment from which a party
    COLES V. SUGARLEAF LABS, INC.
    2022-NCCOA-707
    Opinion of the Court
    may immediately appeal. After careful review, we hold that the trial court’s dismissal
    with prejudice was in error under North Carolina law, vacate that portion of the trial
    court’s order, and remand for entry of a stay. But, because we would otherwise lack
    jurisdiction to consider Plaintiff’s appeal, we dismiss Plaintiff’s appeal without
    consideration of its merits and leave undisturbed the remainder of the trial court’s
    order compelling arbitration.
    I.   FACTUAL AND PROCEDURAL HISTORY
    ¶2         The record below discloses the following:
    ¶3         In 2018, Plaintiff was employed as the president of Sugarleaf Labs, LLC and
    Forest Remedies, LLC, two entities involved in the processing and sale of hemp
    products.   The following year, Defendant Neptune Wellness Solutions, Inc.
    (“Neptune”) purchased Sugarleaf Labs, LLC, and Forest Remedies, LLC, through a
    newly-formed subsidiary, Defendant Sugarleaf Labs, Inc. (“Sugarleaf,” together with
    Neptune as “Defendants”).
    ¶4         Neptune’s purchase of Plaintiff’s employers was memorialized in an Asset
    Purchase Agreement (“APA”).       The APA required Sugarleaf to enter into new
    employment agreements with certain key employees, including Plaintiff. It also
    required that any disputes relating to the APA and its “Ancillary Documents”—
    defined to include Plaintiff’s employment agreement with Sugarleaf—must be
    resolved through arbitration.
    COLES V. SUGARLEAF LABS, INC.
    2022-NCCOA-707
    Opinion of the Court
    ¶5          On 24 July 2019, after the APA was executed, Plaintiff and Sugarleaf entered
    into the contemplated employment agreement; this agreement did not include an
    arbitration provision, and Plaintiff was not a signatory to the earlier APA. However,
    the employment agreement did expressly state that it was a condition of the APA and
    that the employment agreement “include[ed] . . . the agreements and other documents
    referenced in this Agreement.”
    ¶6          Sugarleaf eventually terminated Plaintiff’s employment, leading him to sue
    Defendants for: (1) breach of contract; (2) fraud; (3) negligent misrepresentation; (4)
    Wage & Hour Act violations; (5) injunctive relief; and (6) unfair and deceptive trade
    practices. Defendants filed an answer and subsequently moved “to compel arbitration
    and dismiss, or in the alternative, stay pending arbitration.” Defendants premised
    their motion to compel arbitration on Plaintiff’s admission in his complaint that he
    was a third-party beneficiary under the APA and argued that Plaintiff could only
    enforce the employment agreement consistent with the APA’s mandatory arbitration
    provision. The motion included several exhibits, namely pertinent portions of the
    executed APA, Plaintiff’s employment agreement with Sugarleaf, and emails showing
    Plaintiff’s refusal to arbitrate.
    COLES V. SUGARLEAF LABS, INC.
    2022-NCCOA-707
    Opinion of the Court
    ¶7          Both parties submitted briefs to the trial court in advance of the hearing.
    Plaintiff argued that there was no evidence1 he had agreed to arbitrate any claims
    because he did not sign the APA, and any attempt to enforce the APA’s arbitration
    provision against him would be contrary to North Carolina public policy.
    ¶8          Defendants’ brief asserted that under either the Federal Arbitration Act
    (“FAA”) or the North Carolina Revised Uniform Arbitration Act (“RUAA”), the trial
    court was required to stay the proceeding and compel arbitration. They argued that
    regardless of which statute applied, North Carolina contract and agency law requires
    a third-party beneficiary seeking to enforce a contract with a mandatory arbitration
    provision to do so through arbitration.          Defendants’ brief also included several
    additional documentary exhibits showing Plaintiff’s agency/third-party beneficiary
    relationship to the APA and its signatories.
    ¶9          The trial court heard Defendants’ motion via Webex on 25 January 2021. It
    allowed Defendants’ motion from the bench, concluding that the employment
    agreement was part of the APA (and vice-versa). The trial court did not, however,
    1 Plaintiff challenged the competency and sufficiency of the evidence presented below
    concerning the existence of an agreement to arbitrate, and he maintains that challenge on
    appeal. Because we dismiss his appeal without addressing its substance, we do not purport
    to decide whether the record includes sufficient admissible evidence to compel arbitration or
    support the trial court’s findings of fact to that effect. Goetz v. N.C. Dept. of Health & Human
    Svcs., 
    203 N.C. App. 421
    , 433, 
    692 S.E.2d 395
    , 403 (2010) (holding that appeals dismissed as
    interlocutory contain “no rulings of law which could become the law of the case”).
    COLES V. SUGARLEAF LABS, INC.
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    Opinion of the Court
    expressly indicate whether it was staying the action, which typically occurs when a
    motion to compel arbitration is granted, or dismissing the action, as requested by
    Defendants’ motion.
    ¶ 10          After the parties submitted dueling proposed orders, the trial court entered a
    written order compelling arbitration and dismissing Plaintiff’s complaint with
    prejudice. Plaintiff now appeals, arguing that the dismissal with prejudice is a final
    judgment or, if interlocutory, affects a substantial right. Failing that, he requests
    this Court treat his brief as a petition for writ of certiorari.
    II.     ANALYSIS
    ¶ 11          Plaintiff asserts on appeal that the trial court’s order is immediately
    appealable as a final judgment because it dismissed his complaint with prejudice.
    Defendants maintain that the order is interlocutory, does not affect a substantial
    right, and is thus not subject to immediate appeal. See, e.g., C. Terry Hunt Indus.,
    Inc. v. Klausner Lumber Two, LLC, 
    255 N.C. App. 8
    , 12, 
    803 S.E.2d 679
    , 682 (2017)
    (holding an order compelling arbitration is not immediately appealable for these
    reasons).
    ¶ 12          Both parties are correct to some extent: a dismissal with prejudice is a final
    judgment, but an order compelling arbitration—properly entered—is interlocutory
    and not subject to immediate appeal as of right. Thus, by compelling arbitration and
    dismissing Plaintiff’s complaint with prejudice, the trial court entered something
    COLES V. SUGARLEAF LABS, INC.
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    Opinion of the Court
    akin to Schrodinger’s cat: an appealable unappealable order, an interlocutory final
    judgment.
    ¶ 13          Faced with this quantum-state quandary, and reviewing the relevant statutes
    and caselaw, we hold that the trial court erred in dismissing Plaintiff’s complaint
    with prejudice. After compelling arbitration, the trial court was required to stay
    proceedings based on the mandatory language of the RUAA, which supplies the
    applicable procedural law in this case. We therefore vacate that portion of the order
    and remand for entry of an order staying the action pending arbitration.
    ¶ 14          As for Plaintiff’s substantive arguments contending the trial court erred in
    compelling arbitration, we dismiss that portion of the appeal because our precedents
    establish that such orders are neither final judgments nor interlocutory orders
    affecting a substantial right subject to immediate appeal. Lastly, we decline in our
    discretion to treat Plaintiff’s brief as a petition for writ of certiorari on this issue.
    A. Appellate Jurisdiction Generally
    ¶ 15          Appellate jurisdiction is a threshold issue that we must consider sua sponte.
    Akers v. City of Mount Airy, 
    175 N.C. App. 777
    , 778, 
    625 S.E.2d 145
    , 146 (2006).
    Whether this Court has jurisdiction turns largely on the nature—interlocutory or
    final—of the order from which the parties appeal. A party may always appeal from
    a final judgment, Embler v. Embler, 
    143 N.C. App. 162
    , 164, 
    545 S.E.2d 259
    , 261
    (2001), which our caselaw defines as “one which disposes of the cause as to all the
    COLES V. SUGARLEAF LABS, INC.
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    parties, leaving nothing to be judicially determined between them in the trial court[,]”
    Veazey v. City of Durham, 
    231 N.C. 357
    , 361-62, 
    57 S.E.2d 377
    , 381 (1950). Stated
    differently, “[a] final judgment generally is one which ends the litigation on the
    merits.” Duncan v. Duncan, 
    366 N.C. 544
    , 545, 
    742 S.E.2d 799
    , 801 (2013) (cleaned
    up).
    ¶ 16          Interlocutory orders differ substantially from final judgments both in their
    character and their appealability. Such orders are made “during the pendency of an
    action, which do[] not dispose of the case, but leave[] it for further action by the trial
    court in order to settle and determine the entire controversy.” Veazey, 
    231 N.C. at 362
    , 
    57 S.E.2d at 381
    . In layperson’s terms, an interlocutory order is entered during
    an ongoing court case, while a final judgment ends a lawsuit. And, unlike a final
    judgment, an interlocutory order is only appealable if the order “is final as to some
    but not all of the claims or parties, and the trial court certifies the case for appeal
    pursuant to N.C. Gen. Stat. § 1A-1, Rule 54(b),” N.C. Dept. of Transportation v. Page,
    
    119 N.C. App. 730
    , 734, 
    460 S.E.2d 332
    , 334 (1995), or if it “affects a substantial right
    of the appellant that would be lost without immediate review.” Embler, 143 N.C.
    App. at 165, 
    545 S.E.2d at 261
     (citations omitted). This important limitation serves
    to “prevent fragmentary and premature appeals that unnecessarily delay the
    administration of justice and to ensure that the trial divisions fully and finally
    COLES V. SUGARLEAF LABS, INC.
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    dispose of the case before an appeal can be heard.” Bailey v. Gooding, 
    301 N.C. 205
    ,
    209, 
    270 S.E.2d 431
    , 434 (1980).
    B. Appealability of Orders Compelling Arbitration and Dismissals with
    Prejudice
    ¶ 17         Our caselaw concerning the appealability of orders compelling arbitration
    establishes two key points: (1) “[a]n order compelling the parties to arbitrate is an
    interlocutory order,” Bluffs, Inc. v. Wysocki, 
    68 N.C. App. 284
    , 285, 
    314 S.E.2d 291
    ,
    293 (1984); and (2) “an order compelling arbitration affects no substantial right that
    would warrant immediate appellate review,” C. Terry Hunt Indus., Inc. 255 N.C. App.
    at 12, 803 S.E.2d at 682. Thus, as an ordinary matter, a party may not immediately
    appeal an order compelling arbitration. Id.
    ¶ 18         Equally ordinary, however, is the principle that dismissals of lawsuits with
    prejudice are immediately appealable as final judgments adjudicating matters on the
    merits. See Doe v. Roman Catholic Diocese of Charlotte, 2022-NCCOA-288, ¶ 13
    (noting a summary judgment order dismissing a complaint with prejudice was
    immediately appealed as a final judgment); Clements v. Southern Ry. Co.¸
    179 N.C. 225
    , 
    102 S.E. 399
    , 400 (1920) (“[T]he allowance of a motion to dismiss is final, and of
    course appealable.”); cf. Green Tree Fin. Corp.-Alabama v. Randolph, 
    531 U.S. 79
    , 79-
    80, 
    148 L. Ed. 2d 373
     (2000) (holding that an order compelling arbitration under the
    FAA and dismissing the complaint with prejudice was a final decision subject to
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    immediate appellate review under federal law without deciding whether such a
    dismissal was actually proper under the statute).
    ¶ 19         The order before us places the above precepts in direct tension. Thankfully,
    North Carolina’s RUAA, the FAA, and our state’s caselaw provide a ready release: a
    North Carolina state trial court may not compel arbitration and dismiss a complaint
    with prejudice.
    C. The RUAA Does Not Allow for Dismissal
    ¶ 20         The plain text of the RUAA does not contemplate dismissal upon entry of an
    order compelling arbitration. To the contrary, it requires, in mandatory terms, that
    “the court on just terms shall stay any judicial proceeding that involves a claim
    subject to . . . arbitration.” 
    N.C. Gen. Stat. § 1-569.7
    (g) (2021) (emphasis added); see
    also State v. Johnson, 
    298 N.C. 355
    , 361, 
    259 S.E.2d 752
    , 757 (1979) (“As used in
    statutes, the word ‘shall’ is generally imperative or mandatory.”). Consistent with
    this language, we have mandated stays when reversing and remanding orders
    denying arbitration under the RUAA.         See Fontana v. Southeast Anesthesiology
    Consultants, P.A., 
    221 N.C. App. 582
    , 592 
    729 S.E.2d 80
    , 88 (2012) (“[S]ince we have
    held the breach of the employment contract is subject to arbitration, the trial court
    must stay the proceedings with regard to that claim.” (emphasis added)); Ellison v.
    Alexander, 
    207 N.C. App. 401
    , 415, 
    700 S.E.2d 102
    , 112 (2010) (“[T]he trial court’s
    order denying Defendants’ motion to compel arbitration should be, and hereby is,
    COLES V. SUGARLEAF LABS, INC.
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    reversed and this matter is remanded to the trial court for the entry of an order
    staying all further proceedings and requiring the parties to proceed to arbitration.”).
    ¶ 21         Other analogous decisions further illustrate that a stay, and not dismissal, is
    the proper remedy under the RUAA. In Novacare Orthotics & Prosthetics East, Inc.
    v. Speelman, the trial court granted a defendant’s motion to dismiss on arbitrability
    grounds. 
    137 N.C. App. 471
    , 478, 
    528 S.E.2d 918
    , 922 (2000). We vacated that
    dismissal and remanded the matter for further proceedings, reasoning that
    “defendant’s motion was an application to stay litigation and compel arbitration
    pursuant to [the RUAA’s predecessor statute],” notwithstanding the fact that the
    motion sought outright dismissal of the plaintiff’s complaint. 
    Id.
     And, in another
    case surveying arbitration caselaw, we described a stay as the “appropriate remedy”
    when compelling arbitration. Patel v. Scottsdale Ins. Co., 
    221 N.C. App. 476
    , 484, 
    728 S.E.2d 394
    , 400 (2012) (“After reviewing the relevant decisions of this Court, we note
    that, in the event that a litigant initiates civil litigation on the basis of a claim that
    is subject to arbitration, the appropriate remedy is to order the parties to arbitrate
    their dispute and stay the litigation pending completion of the arbitration process.”).
    Indeed, Defendants’ own brief to the trial court in this matter acknowledged that the
    RUAA calls for a stay when compelling arbitration.
    ¶ 22         Reading the RUAA to require a stay rather than dismissal is also in keeping
    with the purposes and structure of the statute. There is “a strong public policy
    COLES V. SUGARLEAF LABS, INC.
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    favoring the settlement of disputes by arbitration,” Johnston County, N.C. v. R.N.
    Rouse & Co., Inc., 
    331 N.C. 88
    , 91, 
    414 S.E.2d 30
    , 32 (1992), and our arbitration
    statutes serve “to provide and encourage an expedited, efficient, relatively
    uncomplicated, alternative means of dispute resolution, with limited judicial
    intervention or participation, and without the primary expense of litigation—
    attorneys’ fees[,]” Nucor Corp. v. General Bearing Corp., 
    333 N.C. 148
    , 154, 
    423 S.E.2d 747
    , 750 (1992). Notably, the RUAA itself does not allow for appeals from
    orders compelling arbitration; instead, a party contending he was wrongly ordered to
    submit his claim to arbitration may only challenge such a ruling by moving to vacate
    the award on that ground after said award has been rendered by the arbitrator and,
    should the award nonetheless be confirmed, appealing the issue after entry of that
    final judgment. 
    N.C. Gen. Stat. §§ 1-569.28
     & 1-569.23(a)(5) (listing the orders
    appealable under the RUAA—omitting orders compelling arbitration—and instead
    allowing a challenge to arbitrability by motion to vacate an award).2
    2   Orders denying arbitration are, by contrast, immediately appealable under the
    RUAA. 
    N.C. Gen. Stat. § 1-569.28
    (a)(1); see also Prime South Homes, Inc. v. Byrd, 
    102 N.C. App. 255
    , 258, 
    401 S.E.2d 822
    , 825 (1991) (“[A]n order denying arbitration, although
    interlocutory, is immediately appealable because it involves a substantial right which might
    be lost if appeal is delayed.”). This is for good reason. See Katz v. Cellco P’ship, 
    794 F.3d 341
    ,
    346 (2nd Cir. 2015) (“[I]t would make little sense to receive a conclusive arbitrability ruling
    only after a party has already litigated the underlying controversy.”).
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    ¶ 23         With these intentions in mind, it is evident that allowing orders compelling
    arbitration to be entered as final judgments would re-inject the appellate judiciary
    into the proceedings at the exact juncture that the court system is supposed to be
    stepping aside in favor of arbitration. See Henderson v. Herman, 
    104 N.C. App. 482
    ,
    485, 
    409 S.E.2d 739
    , 741 (1991) (noting that, in passing the RUAA’s predecessor
    statute, “the legislature intended the courts to send certain predetermined issues to
    arbitration and then to step back until the arbitration proceeding is complete”). We
    therefore hold, consistent with the plain language and purposes of the RUAA, that a
    trial court must stay proceedings when compelling arbitration. It may not convert
    what is otherwise intended to be an unappealable interlocutory order into an
    appealable final judgment by dismissing a complaint with prejudice.
    D. The RUAA’s Procedural Law Applies Even If the FAA Governs the
    Substantive Law
    ¶ 24         Left unanswered by the above analysis is the FAA’s role in this appeal. That
    statute contains a substantively identical provision to our RUAA that, in apparently
    mandatory terms, requires the trial court to enter a stay of those claims subject to
    arbitration. 
    9 U.S.C. § 3
     (2022) (“[T]he court . . . upon being satisfied that the issue
    involved in such suit or proceeding is referable to arbitration under such an
    agreement, shall on application of one of the parties stay the trial of the action until
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    such arbitration has been had . . . .”).3 Ultimately, what Section 3 of the FAA
    procedurally requires is immaterial, as this Court has held that “Section 3 of the FAA
    only applies in federal district court, not in state court.” Elliott v. KB Home North
    Carolina, Inc., 
    231 N.C. 332
    , 336, 
    752 S.E.2d 694
    , 697 (2013). And because the
    procedural provision of the RUAA compelling a mandatory stay furthers the purposes
    of the FAA by favoring arbitration, the RUAA’s procedural provisions back-fill the
    gap left by Section 3 of the FAA’s inapplicability. See Blow v. Shaughnessy, 
    68 N.C. App. 1
    , 
    313 S.E.2d 868
     (1984) (holding the procedural stay provision of the RUAA’s
    predecessor statute, and not Section 3 of the FAA, provide the remedy when
    compelling arbitration pursuant to an agreement governed by the FAA).
    ¶ 25          The trial court’s order dismissing Plaintiff’s complaint does not comport with
    the law as set forth above. Under the RUAA, the trial court could only stay Plaintiff’s
    complaint, 
    N.C. Gen. Stat. § 1-569.7
    (g), and that procedural remedy is the only one
    available even if the FAA substantively governs the arbitration agreement at issue.
    We therefore vacate the portion of the order that dismisses the complaint with
    3 The federal circuits are presently split as to whether a trial court may dismiss a
    complaint in lieu of stay when compelling arbitration. See Katz, 794 F.3d at 345 (reviewing
    the circuit split before holding that a stay, and not dismissal, is the only appropriate
    disposition in an order compelling arbitration under the FAA). Different panels of the Fourth
    Circuit have rendered conflicting decisions on the matter. See Aggarao v. MOL Ship Mgmt.
    Co., Ltd., 
    675 F.3d 355
    , 376 n.18 (4th Cir. 2012) (noting that there is “some tension” between
    the Fourth Circuit’s various decisions regarding the availability of dismissal under Section 3
    of the FAA).
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    prejudice and remand the matter for entry of an order that stays the action.
    E. No Other Grounds Permit Appellate Review
    ¶ 26          Having held that the portion of the trial court’s order giving this Court
    jurisdiction was in error, we now dismiss the remainder of Plaintiff’s appeal. He has
    made no showing distinguishing this case from the decades of precedents holding
    orders compelling arbitration do not affect a substantial right, relying instead on
    entirely conclusory assertions without citation to caselaw or the record. See K2HN
    Construction NC, LLC v. Five D Contractors, Inc., 
    267 N.C. App. 207
    , 213-14, 
    832 S.E.2d 559
    , 564 (2019) (observing that conclusory arguments are inadequate to raise
    an issue on appeal).
    ¶ 27          We also decline to treat Plaintiff’s brief as a petition for writ of certiorari. Not
    only is making such a request absent a proper petition under Rule 21 of the North
    Carolina Rules of Appellate Procedure disfavored, Doe v. City of Charlotte, 
    273 N.C. App. 10
    , 23, 
    848 S.E.2d 1
    , 11 (2020), but Plaintiff has not demonstrated any basis for
    discarding the two substantial public policy considerations at play in this appeal. See
    Embler, 143 N.C. App. at 165, 
    545 S.E.2d at 261-62
     (discussing the policy behind the
    prohibition against fragmentary interlocutory appeals); Nucor Corp.¸
    333 N.C. at 154
    ,
    
    423 S.E.2d at 750
     (detailing the public policy rationale for favoring arbitration over
    traditional litigation).
    III.     CONCLUSION
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    ¶ 28         For the foregoing reasons, we hold the trial court erred in dismissing Plaintiff’s
    complaint with prejudice, vacate that limited portion of the order, and remand the
    matter for entry of an order that stays the litigation.       We do not address the
    substantive merits of the trial court’s order and pass no judgment as to whether
    arbitration was properly ordered in this case; Plaintiff may properly raise that issue
    before the trial court in the post-award proceedings authorized by statute and upon
    appeal of that interlocutory order from a final judgment confirming the award. See
    C. Terry Hunt Indus., Inc., 255 N.C. App. at 12, 803 S.E.2d at 682 (detailing post-
    award challenges to arbitration under the RUAA); In re Fifth Third Bank, Nat’l Ass’n,
    
    216 N.C. App. 482
    , 487, 
    716 S.E.2d 850
    , 854 (2011) (discussing the same under the
    FAA); N.C. R. App. P. 3 (2022) (allowing a party to designate an appeal from an order
    after judgment).
    VACATED AND REMANDED IN PART; APPEAL DISMISSED IN PART
    Judge DILLON concurs.
    Judge MURPHY concurs by separate opinion.
    No. COA22-116 – Coles v. Sugarleaf Labs, Inc.
    MURPHY, Judge, concurring.
    ¶ 29          I fully join the Majority in its result and its analysis. However, insofar as ¶¶
    22-23 or 27, supra, could be read as even tacitly endorsing our current system or
    supporting a policy favoring arbitration, I write separately to reiterate the
    observations and critiques made in AVR Davis Raleigh, LLC v. Triangle Constr. Co.,
    Inc., 
    260 N.C. App. 459
    , 463-66, 
    818 S.E.2d 184
    , 188-89 (2018) (Murphy, J.,
    concurring). To the extent that I am not bound to do so, I refuse to perpetuate the
    myth that it is the policy of the People of this state to favor arbitration over jury trials.