Coles v. Sugarleaf Labs

Citation: Not availableDocket: 22-116

Court: Court of Appeals of North Carolina; November 1, 2022; North Carolina; State Appellate Court

Original Court Document: View Document

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Tod Coles, the Plaintiff-Appellant, appeals an order from Judge Gregory Hayes of the Catawba County Superior Court compelling arbitration and dismissing his complaint with prejudice. The appeal raises jurisdictional questions, as orders compelling arbitration are generally interlocutory and not immediately appealable, while a dismissal with prejudice is a final judgment. The Court of Appeals concludes that the trial court's dismissal with prejudice was erroneous under North Carolina law, vacates that part of the order, and remands the case for a stay. However, the Court dismisses Coles's appeal without addressing its merits, leaving the order compelling arbitration intact.

The case stems from Coles's employment as president of Sugarleaf Labs, LLC and Forest Remedies, LLC, which were acquired by Neptune Wellness Solutions, Inc. in 2019. The acquisition was documented in an Asset Purchase Agreement (APA) that mandated arbitration for disputes related to the APA and its ancillary documents, including employment agreements. Coles entered into an employment agreement with Sugarleaf that did not include an arbitration clause and he was not a signatory to the APA, although the employment agreement referenced the APA. After his termination, Coles sued the Defendants for several claims, including breach of contract and fraud. The Defendants moved to compel arbitration based on Coles's assertion of being a third-party beneficiary under the APA, arguing he could only enforce his employment agreement according to the APA’s arbitration requirement. Coles contended that he had not agreed to arbitrate, as he did not sign the APA, and argued that enforcing the arbitration provision would violate North Carolina public policy.

Defendants asserted that the trial court was obligated to stay proceedings and compel arbitration under the Federal Arbitration Act (FAA) or the North Carolina Revised Uniform Arbitration Act (RUAA), arguing that North Carolina law mandates a third-party beneficiary enforce contracts with arbitration provisions through arbitration. Document exhibits were provided to support Plaintiff's agency/third-party beneficiary status related to the APA and its signatories. During a Webex hearing on January 25, 2021, the trial court granted Defendants' motion, determining the employment agreement was part of the APA but did not clarify whether it stayed the action or dismissed it as requested. Following the submission of competing proposed orders, the court issued a written order compelling arbitration and dismissing Plaintiff's complaint with prejudice. 

On appeal, Plaintiff contended the dismissal with prejudice constituted a final judgment, while Defendants argued the order was interlocutory and did not impact a substantial right, referencing precedents that indicate orders compelling arbitration are generally not immediately appealable. The court acknowledged the dual nature of the trial court's decision—final in dismissing the complaint but interlocutory concerning the arbitration order—and concluded the dismissal with prejudice was erroneous. It found that after compelling arbitration, the trial court should have stayed the proceedings as mandated by the RUAA. The court vacated the dismissal and remanded for a stay pending arbitration. Additionally, Plaintiff's arguments against the arbitration order were dismissed, as such orders are neither final judgments nor immediately appealable interlocutory orders. The request to treat the appeal as a petition for writ of certiorari was also declined. 

Appellate jurisdiction was highlighted as a critical aspect, emphasizing that a final judgment disposes of all issues between parties, concluding litigation on the merits.

Interlocutory orders are distinct from final judgments as they occur during an ongoing action and do not resolve the case, leaving it for further proceedings. Such orders can only be appealed if they are final concerning some claims or parties, with trial court certification for appeal or if they affect a substantial right of the appellant. This limitation aims to avoid premature appeals that could hinder justice. 

In North Carolina, orders compelling arbitration are classified as interlocutory and do not affect substantial rights warranting immediate appeal. Conversely, dismissals with prejudice are final judgments and thus immediately appealable. However, under North Carolina's Revised Uniform Arbitration Act (RUAA), a trial court cannot compel arbitration and dismiss a complaint with prejudice. The RUAA mandates that courts must stay proceedings involving claims subject to arbitration, as indicated by the term "shall," which implies a mandatory action. Consequently, since the breach of the employment contract is subject to arbitration, the trial court is required to stay the proceedings on that claim.

A stay, rather than dismissal, is the appropriate remedy under the Revised Uniform Arbitration Act (RUAA) when a litigant initiates a claim subject to arbitration. Relevant case law, including Novacare Orthotics, Prosthetics East, Inc. v. Speelman and Patel v. Scottsdale Ins. Co., supports the position that courts should order parties to arbitrate their disputes and stay litigation until arbitration concludes. The RUAA emphasizes a strong public policy favoring arbitration as a means of efficient dispute resolution with limited judicial involvement, as established in cases like Johnston County, N.C. v. R.N. Rouse Co. Inc. The statute itself does not permit appeals from orders compelling arbitration, allowing challenges only after an arbitration award is made, thereby reinforcing the notion that orders compelling arbitration should remain non-appealable. Conversely, orders denying arbitration are immediately appealable due to the potential loss of substantial rights. Allowing appeals from orders compelling arbitration would undermine the intent of the RUAA by reintroducing judicial oversight at a point when arbitration is meant to take precedence. Consequently, trial courts are required to stay proceedings when compelling arbitration and cannot convert non-appealable interlocutory orders into appealable final judgments through dismissal. Additionally, the procedural aspects of the RUAA are applicable even when the Federal Arbitration Act (FAA) governs substantive law.

The excerpt addresses the role of the Federal Arbitration Act (FAA) in the context of a legal appeal, specifically noting that while the FAA mandates a stay of claims subject to arbitration in federal courts, it does not apply in state courts. The North Carolina Uniform Arbitration Act (RUAA) contains similar provisions that enforce a mandatory stay, filling the gap left by the FAA’s inapplicability in this jurisdiction. The trial court's dismissal of the Plaintiff’s complaint was incorrect; under the RUAA, the only appropriate action would have been to stay the complaint. Consequently, the appellate court vacates the dismissal and remands the case for an order to stay the action.

Furthermore, the court dismisses the remainder of the Plaintiff’s appeal, finding that he failed to demonstrate a substantial right affected by the trial court's arbitration order, relying instead on unsupported assertions. The court also declines to treat the Plaintiff’s brief as a petition for writ of certiorari due to the lack of proper procedure and absence of compelling public policy reasons.

In conclusion, the appellate court vacates part of the trial court's order, remands the case for a stay, and dismisses the appeal without addressing the substantive merits of the arbitration issue, allowing the Plaintiff to raise those matters in future proceedings. Judge Murphy concurs but expresses reservations about the prevailing policy favoring arbitration over jury trials.