Epic Games, Inc. v. Murphy-Johnson

247 N.C.App. 54

785 S.E.2d 137

EPIC GAMES, INC., Plaintiff

v.Timothy F. MURPHY–JOHNSON, Defendant.

No. COA15–454.

Court of Appeals of North Carolina.

April 19, 2016.

Hunton & Williams, LLP, by R. Dennis Fairbanks, Douglas W. Kenyon, Raleigh, Ryan G. Rich, Charlotte and Michael R. Shebelskie, for plaintiff-appellee.

David E. Shives, PLLC, by David E. Shives, and McGowan, Hood & Felder, LLC, by Chad A. McGowan, William A. McKinnon, and Jordan C. Calloway, for defendant-appellant.

CALABRIA, Judge.

Timothy F. Murphy–Johnson ("Johnson") appeals from an order granting Epic Games, Inc.'s ("Epic Games") application for judicial relief to enjoin arbitration in part. We reverse.

I. Background

Defendant, Johnson, is a computer programmer. While attending college in the United Kingdom, he founded a software company, Artificial Studios, and created Reality Engine, a successful computer software program that served as a platform for game developers to construct video games. In March 2005, Timothy Sweeney, the founder and largest shareholder of Epic Games, along with Michael Capps, the company's president, negotiated with then-twenty-one-year-old Johnson to purchase Reality Engine and recruited him to move from London to North Carolina to work for Epic Games. On 10 May 2005, Johnson executed seven contracts that purported to sell Artificial Studios and Reality Engine and its related intellectual property to Epic Games, in exchange for employment with Epic Games, company stock options, and cash.

The seven contracts can be divided into two groups. First, Epic Games bought Reality Engine from Artificial Studios and then licensed it back to Artificial Studios. Those agreements were labeled "Reality Engine Acquisition Agreement" and "Reality Engine Limited License Agreement." Second, Epic Games hired Johnson and executed five related contracts. Those agreements were labeled "Stock Option Agreement," "Residual Rights Acquisition Agreement," "Non–Competition Agreement," "Confidentiality Obligations and Intellectual Property Rights Agreement," and "Employment Agreement."

The Employment Agreement contained the following arbitration clause:

Any disputes between Employee and Epic in any way concerning his employment, this Agreement or this Agreement's enforcement, including the applicability of this Paragraph, shall be submitted at the initiative of either party to mandatory arbitration before a single arbitrator and conducted pursuant to the rules of the American Arbitration Association [ ("AAA") ] applicable to the arbitration of employment disputes then in effect, or its successor, provided however, that this Paragraph does not apply to the Confidentiality Obligations and Intellectual Property Rights Agreement referred to in Paragraph 7, and attached as Exhibit A. The decision of the arbitrator may be entered as judgment in any court of the State of North Carolina.

The Employment Agreement also contained a choice-of-law provision: "This Agreement shall be governed by the law of the State of North Carolina[.]"

According to the Stock Option Agreement, Johnson's stock options and bonuses were to vest over a four-year period. For this reason, according to Johnson, he requested that Epic Games draft a strict for-cause termination provision in the Employment Agreement. Johnson wrote Capps:

My lawyer's been explaining to me that "for cause" termination is not something I should count on as ensuring I will be employed, as so long as the determination of cause rests on Epic you can terminate me and the burden of proof would be on me, which means I'd have to litigate at a cost that would be prohibitive. Therefore while he thinks that's "fair" for purely employment terms, he said it's not very sensible to tie the $75K and stock options related to the deal to employment in this way if I feel this is part of the value for selling my company.

My first question is therefore whether you're prepared to narrow "for cause" to what we initially agreed, namely that I'd have to commit some crime or other malicious act or act of total incompetence, and the burden of proof in "for cause" termination rests on Epic, not me....

Epic Games' Vice President of Business Development, Jay Wilbur, responded:

Our goal is to have you join the Epic family. What you read in the employment agreement is that [sic] same for all Epic employees. I'm willing to consider changes but I need a little something back for it.

I'll give you the narrower "for cause" if you give me the Reality Engine marks, domains, websites, etc. as part of that assignment.

Johnson agreed. The narrowed "for cause" provision read:

b. Termination For Cause. Employer may terminate Employee's employment at any time, with or without notice, for any one or more of the following reasons: (i) willful and continual failure to substantially perform his duties with Employer (other than a failure resulting from the Employee's disability) and such failure continues after written notice to Employee providing a reasonable description of the basis for the determination that Employee has failed to perform his duties, (ii) indictment for a criminal offense other than misdemeanors not required to be disclosed under the federal securities laws, (iii) breach of this Agreement in any material respect and such breach is not susceptible to remedy or cure and has already materially damaged the [sic] Epic, or is susceptible to remedy or cure and no such damage has occurred, is not cured or remedied reasonably promptly after written notice to Employee providing a reasonable description of the breach, (iv) Employee's breach of fiduciary duty to Employer, material unauthorized use or disclosure of Employer's confidential or proprietary information or competition with Employer; (iv) [sic] Employee's intentional conduct or omission which reasonably has or is likely to have the effect of materially harming Employer's business; (v) conduct that the Employer has reasonably determined to be dishonest, fraudulent, unlawful or grossly negligent, and such conduct is not cured or remedied reasonably promptly after written notice to Employee providing a reasonable description of the conduct at issue, any one of which shall be deemed "Cause" for dismissal. The determination of whether an event, act or omission constitutes "Cause" hereunder shall rest in the reasonable exercise of the Employer's discretion....

On 20 March 2006, approximately two months before his first round of stock options and bonuses were scheduled to vest, Epic Games fired Johnson. When Johnson was "terminated with cause" by Epic Games, he had been employed for less than one year, from 10 May 2005 until 20 March 2006. The termination letter stated, in pertinent part:

We regret to inform you that your employment with Epic Games is terminated with cause effective March 20, 2006 as a result of your repeated performance problems, conduct issues and attendance concerns, which you have failed to remedy despite verbal and written warnings. Epic has determined that these issues at the very least amount to a material failure to devote your entire professional time, attention, skill and energies to Epic's business and the responsibilities assigned to you by Epic, a willful and continual failure to substantially perform your duties, gross negligence, and intentional conduct that is potentially materially damaging to Epic's business. Any one of these supports a "for cause" termination.

On 7 March 2014, Johnson filed a demand for arbitration with the AAA alleging breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty. Specifically, Johnson alleged that Epic Games breached the Employment Agreement by wrongfully terminating him; breached the covenant of good faith and fair dealing under the Employment Agreement and the related agreements by depriving him of the benefit of the sale of Artificial Studios and Reality Engine; and breached fiduciary duties owed to him under the Employment Agreement, Stock Option Agreement, and related agreements. Johnson sought the following pertinent forms of relief:

1. [A] declaration that Epic Games, Inc. willfully breached [the] Employment Agreement;

2. ... [D]amages for [Epic Games'] breach of at least $11,300,000, representing the value of stock, bonus, and other payments due [Johnson] under the Employment Agreement, or, in the alternative, that [Johnson] be awarded 1,966 shares of undiluted stock in Epic Games, Inc. and $4,300,000 in other payments due;

3. ... [A]ny copyright or other intellectual property assignment from [Johnson] or Artificial Studios to Epic be declared null and void;

4. ... [L]ost profits of Artificial Studios; 5. ... [P]unitive damages for conduct that reflects fraud, deceit, or malicious behavior[.]

On 24 March 2014, Epic Games filed a motion, as an application for judicial relief, to enjoin arbitration in part in Wake County Superior Court, alleging that Epic Games never consented to arbitrate certain claims asserted by Johnson. Epic Games also alleged that Johnson did not object for eight years to the termination of his employment. Johnson denied this allegation in his answer and counterclaim.

On 18 April 2014, Johnson removed the case to the United States District Court for the Eastern District of North Carolina. On 2 May 2014, after hearing Epic Games' application to enjoin arbitration in part, the Honorable G. Bryan Collins, Jr. of Wake County Superior Court entered an order in favor of Epic Games. (This order was later stricken due to lack of jurisdiction.) On 9 July 2014, the federal court remanded the case to Wake County Superior Court.

On 18 July 2014, the trial court held a de novo hearing on Epic Games' application for judicial relief and to enjoin arbitration in part. Subsequently, the trial court granted Epic Games' application for judicial relief and entered a written order enjoining arbitration of the following claims:

4.1 The third cause of action for breach of fiduciary duty alleged

...