Choice of Law in Unfair-Trade-Practices Cases

Can a contractual choice of law disable N.C. Gen. Stat. § 75-1.1? Yes, according to a recent decision from a federal court in New York.

In Canon U.S.A., Inc. v. Cavin’s Business Solutions, Inc., a business filed a 75-1.1 claim against a North Carolina defendant. The claim centered on a business contract—a contract that stipulated that it was governed by New York law. Under New York law on unfair trade practices, the plaintiff’s proposed claim would fail.

Those points required the court to ask whether applying New York law would violate a fundamental public policy of North Carolina. The court answered no.

New York, New York

The Canon decision arises from lawsuits that Canon filed against four dealers of Canon products. One of the dealers, Cavin’s Business Solutions, has its headquarters in North Carolina.

Canon filed the lawsuits in the U.S. District Court for the Eastern District of New York. The court consolidated the cases, because they all involved a standard agreement between Canon and its dealers.

The dealer agreements all contain the same choice-of-law clause. It says that the agreements “shall be governed by and construed in accordance with the laws of the state of New York.”

In the lawsuits, Canon claimed that the dealers submitted false documents to Canon and reaped financial benefits by doing so. Canon sued to recoup those benefits and to recover additional damages.

Canon pursued three claims against the dealers: breach of contract, fraud, and unfair trade practices. Canon asserted its unfair-trade-practices claims under the laws of North Carolina, Nevada, and Florida—the states in which the dealers have their headquarters.

The dealers filed motions to dismiss. They argued that the choice-of-law clause in the dealer agreements barred Canon from asserting unfair-trade-practices claims under North Carolina, Nevada, and Florida law. Any claim of that nature, they argued, had to be pursued under New York law. That law, as interpreted by the New York courts, limits private unfair-trade-practices claims to consumers alone. Canon, obviously, is not a consumer.

In response to the motions to dismiss, Canon argued that applying the New York choice-of-law clause would violate a fundamental public policy of North Carolina, Nevada, and Florida—a policy reflected in each state’s unfair-trade-practices statute. Canon argued that choice-of-law principles reject contractual choices of law that violate fundamental public policies.

When Is a Public Policy “Fundamental”?

Under New York’s conflict-of-laws regime, a contractual choice of law will not be enforced if application of the chosen law would violate a fundamental public policy of the jurisdiction whose law would otherwise apply. (The same is true under North Carolina’s choice-of-law regime.)

In Canon, District Judge Joseph F. Bianco put the onus on Canon to show why the public policies of North Carolina, Nevada, and Florida that prohibit fraudulent commercial conduct were fundamental enough to overcome the choice-of-law clause in the dealer agreements.

The court decided that Canon did not make this showing. In particular, Canon didn’t identify any authority from North Carolina, Nevada, or Florida that calls the enforcement of these states’ unfair-trade-practices statutes fundamental. These statutes are “significan[t],” the court explained, but that does not necessarily mean that they embody a fundamental public policy. (Unfortunately, the court did not explain what characteristics might make a public policy fundamental, rather than just significant.)

The court also saw no reason why North Carolina, Nevada, and Florida have materially greater interests in this dispute than New York has. New York, after all, has its own statute and case law on unfair trade practices. The fact that New York law is narrower than the laws of North Carolina, Nevada, and Florida does not mean that New York’s interest is somehow less important than the interests of the other three states.

The court rounded out its analysis by citing a New York decision, Finucane v. Interior Construction Corp. In Finucane, the court enforced an Oklahoma choice-of-law clause even though Oklahoma law on indemnification—the issue in that case—was more permissive than New York law on indemnification. According to the Canon court, Finucane shows that the mere fact that one state’s law is different does not mean that the different law offends the public policy of another state.

In Canon, then, the mere fact that New York law differed from North Carolina, Nevada, and Florida law on unfair trade practices did not automatically mean that applying New York law would offend fundamental public policies.

Lessons for 75-1.1 Claims Based on Contracts with Choice-of-Law Provisions

Canon is an important case for business litigators in North Carolina.

Complex business litigation, after all, often concerns business contracts.  Many—if not most—business contracts have choice-of-law clauses. Canon shows that these clauses can limit the ability to seek treble damages. This is true even if a section 75-1.1 claim is based on conduct in North Carolina.

Canon is important for another reason as well: it underscores the point that a mere difference in law across jurisdictions does not mean that applying one jurisdiction’s law offends the public policy of the second jurisdiction.

Given the number of complex business cases that turn on interstate fact patterns, Canon reminds us that arguing for the application of one state’s law might require a deep dive into the public policies of a different state.

Author: Stephen Feldman

Preemption by Any Other Name Would Smell as Sweet: The Exemption for “Pervasive and Intricate Regulation” by Another Field of Law

Courts often opine on the relationship between N.C. Gen. Stat. § 75-1.1 and other bodies of law. In a recent case, a federal court announced a rare holding of that type: a holding that another body of law regulates an area so pervasively that applying section 75-1.1 is impossible.

A slow-developing fact pattern

Hagy v. Advance Auto Parts, Inc. arose from a subrogation dispute. In 2009, an employee of Advance Auto Parts, Jesse Worley, was injured on the job. He received medical and disability benefits through the North Carolina Workers’ Compensation Act. 

Worley’s employment later ended, but his medical needs continued. He argued that his post-employment medical issues stemmed from his workplace accident. Advance Auto disagreed and refused further payments. 

Worley pursued a claim before the North Carolina Industrial Commission. After the commission decided in Worley’s favor, the parties settled that workers’-compensation dispute.

Shortly after that settlement, Worley died. His daughter became the personal representative of his estate.

In late 2014, the federal Medicare agency reported that it had paid tens of thousands of dollars for Worley’s medical care, but had not been reimbursed by Advance Auto—the party that was primarily responsible, under workers’-compensation law, for these medical expenses.

Based on this failure to reimburse Medicare, the Worley estate sued Advance Auto and related parties. The estate’s primary claim arose from the Medicare Secondary Payer Act—a statute that creates a private cause of action for double damages. The estate also claimed that Advance Auto’s failure to reimburse Medicare violated section 75-1.1.

Advance Auto moved to dismiss this 75-1.1 claim. Magistrate Judge David Keesler recommended that the district court dismiss the 75-1.1 claim because any failure to reimburse Medicare had not injured Worley. According to the complaint, Worley received medical care, and he was not responsible for any of the resulting bills.

Judge Keesler also recommended dismissing the 75-1.1 claim on a broader basis. He held that the Medicare statutes pervasively regulate reimbursement of Medicare outlays. He saw a “problematic overlap” between these statutes and section 75-1.1. That overlap, in Judge Keesler’s view, barred the Worley estate’s 75-1.1 claim.

Yes, Medicare is pervasive and intricate

The Worley estate objected to Judge Keesler’s recommendation to dismiss the 75-1.1 claim. The estate argued that Judge Keesler had mistakenly applied federal preemption. The estate went on to argue that allowing recovery under section 75-1.1 is consistent with the Medicare statutes.

District Judge Robert Conrad, however, dismissed the estate’s 75-1.1 claim. The court held that the issue here is not preemption, but the scope of section 75-1.1 itself.

As the court explained, section 75-1.1 does not apply when other bodies of law already create a “pervasive and intricate” regulatory scheme. Courts have applied this type of 75-1.1 exemption to (among other claims) securities disputes, commodities disputes, tax disputes, and some employment-related cases.

The Hagy court held that this type of exemption defeated the Worley estate’s claims. The Medicare statutes and regulations are “convoluted and complex,” especially when Medicare acts as a secondary payer of medical expenses. In that situation, federal law creates robust remedies and clear guidelines on when those remedies apply. In view of those remedies, the Hagy court held that the Medicare laws create a “pervasive and intricate” regulatory scheme that crowds out private claims under section 75-1.1.

The court also observed that Worley and Advance Auto did not have the type of relationship that one typically sees in a 75-1.1 claim. For example, Worley was not a consumer of Advance Auto’s products or a competitor of the company. This relationship-based reasoning might need further development, given how many 75-1.1 claims between companies and former employees have succeeded.

For all of these reasons, the district court held that the Worley estate’s claim fell outside the scope of section 75-1.1. Having dismissed the claim on that basis, the court didn’t decide whether the estate had alleged a qualifying injury.

The future of the “pervasive and intricate regulation” doctrine

It’s hard to know how far the reasoning in Hagy will extend. Courts have applied categorical exemptions from section 75-1.1 in relatively few fields. Medicare, moreover, seems like an especially strong candidate for an exemption: It involves an especially detailed regulatory structure. Indeed, it even offers a private claim for double damages.

In view of these points, further arguments will be needed before defendants can extend the Hagy exemption to less-heavily regulated fields.

Author: Jeremy Falcone

Can Forcing a Company into Bankruptcy be an Unfair or Deceptive Trade Practice?

Can a bankruptcy trustee prove a violation of N.C. Gen. Stat. § 75-1.1 based on business strategies that forced a debtor into bankruptcy?

The U.S. Bankruptcy Court for the Eastern District of North Carolina recently addressed this question in In re American Ambulette & Ambulette Service, Inc. 

The Debtors’ Corporate Parents Allegedly Force the Debtors to Liquidate

The debtors in American Ambulette were in the medical-transport business. Each of them filed for liquidation under chapter 7 of the bankruptcy code. The bankruptcy court consolidated the cases and appointed a single bankruptcy trustee to administer the debtors’ assets.

The trustee then filed an adversary proceeding against the debtors’ parent and sibling corporations, as well as their officers and directors.

The trustee alleged that the debtors’ corporate parents developed a business plan to expand their operations. As part of the expansion plans, the parent entities established two new subsidiaries. The new subsidiaries allegedly competed with the debtors. According to the trustee, the corporate parents and the officers and directors caused the debtors to incur substantial expenses to further the expansion plans.

The trustee accused the defendants of (1) diverting the fruits of their business-development activities to the competing subsidiaries, (2) transferring assets from the debtors to those subsidiaries, and (3) forcing the debtors into liquidation. Those activities, the trustee argued, eliminated the debtors as competition for the new subsidiaries.

These allegations fueled a 79-page complaint from the trustee. The complaint included a claim against the parent companies and their officers and directors for violations of section 75-1.1.

The Defendants Won the Battle, but Did They Win the War?

The defendants moved to dismiss. The motion largely relied on a recent federal district court decision. The defendants argued that, under the recent decision, a business can pursue a 75-1.1 claim only when the business has acted as a consumer or has engaged in commercial dealings with the defendant.

The defendants conceded that the trustee’s complaint described commercial dealings. They argued, however, that the allegations about those dealings did not state a violation of section 75-1.1. They stressed that the defendants on the 75-1.1 claim did not include the competing subsidiaries themselves.

The bankruptcy court granted the motion to dismiss. The court identified three categories of cases in which a business plaintiff may assert a 75-1.1 claim:

  • The plaintiff has acted as a consumer or has otherwise engaged in commercial dealings with the defendant.
  • The plaintiff and the defendant have competed with each other.
  • The conduct that gives rise to the claim has had a negative effect on the consuming public.

In American Ambulette, the trustee did not allege that the debtors engaged in commercial dealings with—or were competitors of—the defendants themselves. The complaint also lacked any allegations on how the defendants’ conduct affected consumers. 

These points led the bankruptcy court to dismiss the complaint, albeit with leave to amend.

Shortly after this order, the trustee filed an amended complaint. The amended complaint adds the competing subsidiaries as parties to the 75-1.1 claim. It also asserts that the defendants’ actions benefited the competing subsidiaries. Finally, it includes detailed allegations on how those actions affected the marketplace and the consuming public.

The Takeaway

American Ambulette suggests that if corporate parents merely run a company into the ground and force it to liquidate, that activity alone would not support a 75-1.1 claim. In the case itself, however, the 75-1.1 claim survived because the parents formed competing entities and then diverted corporate opportunities and assets to those new entities.

The defendants’ time to respond to the amended complaint has not run. We’ll be interested to see:

  • whether the 75-1.1 exemption for activities within a single business comes up,
  • whether the alleged diversions are considered commercial dealings, and
  • whether the trustee has alleged enough on whether those alleged activities affected competitors or consumers.

As American Ambulette illustrates, bankruptcy cases often generate different styles of 75-1.1 claims from the styles that one sees in other trial courts.

Author: George Sanderson