Coles v. Sugarleaf Labs ( 2022 )

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
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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.
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¶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.
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¶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”).
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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
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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
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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
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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,
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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
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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.