Coles v. Sugarleaf Labs

Citation: Not availableDocket: 22-116

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

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Plaintiff Tod Coles appeals a trial court order that compelled arbitration and dismissed his complaint with prejudice. The court must determine its jurisdiction over the appeal, as orders compelling arbitration are typically not immediately appealable; however, a dismissal with prejudice is considered a final judgment. The appellate court finds that the trial court's dismissal was erroneous under North Carolina law and vacates that part of the order, remanding for a stay. The court ultimately dismisses the appeal due to a lack of jurisdiction to consider its merits, leaving the order compelling arbitration intact.

Factual background reveals that in 2018, Coles was president of Sugarleaf Labs, LLC and Forest Remedies, LLC, which were purchased by Neptune Wellness Solutions, Inc. in 2019. This acquisition was documented in an Asset Purchase Agreement (APA) that required new employment agreements, including Coles', to resolve disputes via arbitration. Coles entered an employment agreement on July 24, 2019, which did not contain an arbitration clause but stated it was conditioned on the APA and referenced its documents. Following his termination, Coles sued Defendants for various claims, leading them to move to compel arbitration based on his admitted status as a third-party beneficiary under the APA, asserting that he could only enforce the employment agreement consistent with the arbitration requirement.

The motion included exhibits from the executed Asset Purchase Agreement (APA), Plaintiff's employment agreement, and emails showing Plaintiff's refusal to arbitrate. Plaintiff argued he had not agreed to arbitration since he did not sign the APA, and enforcing its arbitration provision would violate North Carolina public policy. Defendants countered that both the Federal Arbitration Act (FAA) and the North Carolina Revised Uniform Arbitration Act (RUAA) required the trial court to compel arbitration and stay proceedings. They provided evidence of Plaintiff's third-party beneficiary status concerning the APA.

The trial court held a hearing on January 25, 2021, and granted Defendants' motion, concluding that the employment agreement was part of the APA. However, it did not clarify whether it was staying the action or dismissing it as requested. After both parties proposed orders, the court issued a written order compelling arbitration and dismissing Plaintiff's complaint with prejudice. Plaintiff appealed, claiming the dismissal constituted a final judgment or, if interlocutory, affected a substantial right.

On appeal, Plaintiff argued the order was a final judgment due to the dismissal with prejudice, while Defendants contended it was interlocutory and did not affect a substantial right. The appellate analysis acknowledged that a dismissal with prejudice is a final judgment, but an order compelling arbitration is typically interlocutory. The court held that the trial court erred by dismissing Plaintiff's complaint with prejudice after compelling arbitration; it should have stayed the proceedings per the RUAA. Consequently, the appellate court vacated the dismissal and remanded for an order to stay the action pending arbitration.

Plaintiff's appeal regarding the trial court's order to compel arbitration is dismissed, as such orders are neither final judgments nor interlocutory orders affecting substantial rights eligible for immediate appeal. Appellate jurisdiction is assessed by determining whether the order is final or interlocutory. Final judgments dispose of all parties and issues, ending the litigation, while interlocutory orders do not complete the case and may only be appealed if they are certified for appeal or affect a substantial right. The appealability of orders compelling arbitration is clarified: these orders are interlocutory and do not affect substantial rights, thus not warranting immediate review. In contrast, dismissals with prejudice are final judgments that can be immediately appealed.

North Carolina’s Revised Uniform Arbitration Act (RUAA) mandates that state trial courts must stay judicial proceedings involving claims subject to arbitration rather than dismissing them with prejudice. The plain language of the RUAA specifies that courts "shall stay" such proceedings, indicating a mandatory requirement. Previous case law supports this interpretation, consistently reversing orders that deny arbitration and requiring stays instead. For instance, in Fontana v. Southeast Anesthesiology Consultants, the court emphasized that the trial court must stay proceedings on claims subject to arbitration. The appellate courts have also clarified that a stay, rather than dismissal, is the appropriate remedy when compelling arbitration. This aligns with the public policy favoring arbitration as a means of dispute resolution, aiming for efficiency and reduced judicial intervention. Furthermore, the RUAA does not permit appeals from orders compelling arbitration; challenges can only be made post-arbitration through motions to vacate awards. Conversely, orders denying arbitration are immediately appealable.

An order denying arbitration is immediately appealable as it involves a substantial right that may be lost if not addressed promptly, preventing a situation where a party must litigate after an arbitrability ruling. Allowing orders compelling arbitration to be treated as final judgments would counteract the purpose of arbitration by reintroducing appellate review at a critical point. The legislature intended for courts to refer specific issues to arbitration and refrain from further involvement until arbitration concludes. Consequently, trial courts are required to stay proceedings when compelling arbitration and cannot convert interlocutory orders into appealable final judgments by dismissing complaints with prejudice.

The Federal Arbitration Act (FAA) includes a similar provision mandating stays for claims subject to arbitration, but it only applies in federal courts. Therefore, the procedural requirements of North Carolina’s Revised Uniform Arbitration Act (RUAA) fill the gap left by the FAA’s inapplicability in state courts. 

In this case, the trial court's dismissal of the Plaintiff’s complaint does not align with established law; it should have stayed the complaint instead. Consequently, the court vacates the dismissal with prejudice and remands for a stay of the action. Additionally, the appeal is dismissed as the Plaintiff did not demonstrate a substantial right affected by the trial court’s order, relying instead on unsubstantiated assertions without legal support.

The court declined to classify Plaintiff's brief as a petition for writ of certiorari due to the absence of a proper petition under Rule 21 of the North Carolina Rules of Appellate Procedure. The Plaintiff failed to address two significant public policy considerations relevant to the appeal. The court determined that the trial court erred by dismissing the Plaintiff's complaint with prejudice, leading to a vacating of that portion of the order and a remand for a stay of litigation. The court refrained from addressing the substantive merits related to arbitration, allowing the Plaintiff to raise such issues in post-award proceedings as permitted by law. The decision noted the relevant statutory provisions and case law regarding post-award challenges to arbitration. The ruling was partially vacated and remanded, with part of the appeal dismissed. Judge Murphy, while concurring with the result, expressed reservations about endorsing a policy favoring arbitration over jury trials, referencing critiques made in a prior case.