61 Million Reasons to Carefully Oversee Your Third-Party Marketer?

As we’ve mentioned before, federal privacy statutes that permit lawsuits and award automatic damages can be a fertile source of consumer class action litigation.

The Telephone Consumer Protection Act (TCPA) fits this bill.  Under the TCPA, telemarketers cannot call residential phone numbers on the National Do Not Call Registry. A TCPA  violation results in statutory damages of up to $500 per unlawful call. Those damages can be trebled if the defendant knowingly or willfully violated the act. 

The consequences of willful TCPA violations were on full display in Krakauer v. Dish Network, a recent case in the Middle District of North Carolina. Krakauer is notable both because it presents a rare example of a federal civil case proceeding to a jury trial, and because it resulted in a $61 million treble damages award.

Krakauer is particularly interesting because the defendant, Dish Network, did not even make the telemarketing calls at issue. Rather, those calls were made by a third party marketer that Dish Network hired to sell its satellite television programming.

The case thus turned on a key issue: when can a defendant be responsible for “knowing and willful” TCPA violations committed by a marketer acting on the defendant’s behalf?

Hello, is it Dish you’re looking for?

Krakauer concerned telemarketing calls made by Satellite Systems Network, a marketer that Dish hired to sell Dish’s satellite television programming and related services. The class action complaint alleged that Satellite made thousands of calls to individuals who registered their numbers on the Do Not Call Registry. The plaintiffs alleged that Dish should be liable for those TCPA violations. They sought statutory damages for each call, and sought to treble those damages for willful or knowing violations. 

After surviving a Spokeo-based standing challenge, and overcoming Dish’s summary judgment motion, the case proceeded to trial, where the plaintiffs presented evidence that showed that:

  • Dish’s agreement with Satellite gave Dish broad power to oversee and control Satellite’s telemarketing activities;
  • Dish received numerous complaints about Satellite’s telemarketing practices; and
  • Dish typically instructed Satellite to put complainants on Satellite’s internal do-not-call list and not to call them again, but didn’t do anything else.

The jury ruled against Dish. It found that Satellite acted as Dish’s agent in making over 51,000 calls to numbers on the Do Not Call Registry, and awarded statutory damages of $400 per call, for a total award of over $20 million.

The Court then considered whether to treble those damages. 

Can a principal be charged with “knowing and willful” conduct for TCPA violations committed by an agent?

The Court’s opinion on that issue evaluated whether the TCPA violations were “knowing or willful.” The Court first noted that existing case law didn’t specify whose conduct should be the focus of that inquiry in a case involving calls made by an agent: the agent’s or the principal’s.

The Court avoided deciding that issue, because it found that damages could be trebled whether the court focused on Satellite’s conduct and imputed it to Dish, or looked only at Dish’s own conduct. 

As to Dish’s own conduct, the court found the following factors established Dish’s willfulness:

  • Dish’s agreement with Satellite gave it “virtually unlimited rights to monitor” Satellite and “complete control” over Satellite’s telemarketing calls;
  • Dish was aware that Satellite had a history of TCPA violations, but failed to closely monitor the telemarketing it conducted on Dish’s behalf; and
  • Dish turned a “blind eye” to complaints that came to its attention, asking only that Satellite stop calling the specific person who complained.

This evidence, the Court concluded, showed that Dish’s TCPA compliance policy was “decidedly two-faced.”  “On paper,” said the Court, Dish had “committed to monitoring its marketers’ compliance with telemarketing laws and investigating complaints.”  Its failure to do so in practice, the Court concluded, showed that Dish “knew or should have known” that Satellite was violating the TCPA, but “cared about stopping complaints, not about achieving TCPA compliance.” 

The Court thus trebled the per-call damages from $400 to $1,200, leading to a total damages award of more than $61 million.

Lessons from Krakauer

Krakauer presents a conundrum for companies that seek to manage risk presented by third-party marketers. 

Given the stakes, those companies often insist on agreements that give them a high degree of control over the marketers’ activities, and extensive rights to monitor and enforce the marketers’ compliance with the TCPA. 

But Krakauer may create an incentive for companies to avoid including these terms in their agreements with vendors, lest they lead to a finding of willfulness when a marketer fails to live up to its TCPA duties. Indeed, the potential for that outcome was recently cited as a reason not to impose punitive damages on Dish in a separate TCPA enforcement action brought against the company by the Federal Trade Commission and four state attorneys general (including North Carolina’s) in the United States District Court for the Central District of Illinois. 

However a company chooses to address prospective TCPA compliance in its agreements with marketers, Krakauer makes clear that once it becomes aware of TCPA compliance issues presented by a marketer who makes calls on its behalf, the company ignores those issues at its peril. 

Author: Alex Pearce

How to Win Attorney Fees When Defending an Unfair-Trade-Practices Claim

A prevailing defendant on a claim for violation of N.C. Gen. Stat. § 75-1.1 can obtain attorney fees, but the bar is high.  The defendant must show that the plaintiff knew or should have known that the action was both frivolous and malicious.

What facts can satisfy these standards? The recent North Carolina Business Court decision in Sloan v. Inolife Technologies gives some answers.

This post studies the facts, reasoning, and conclusion in Sloan—a decision that might dissuade some litigators from tacking a section 75-1.1 claim onto future complaints as a matter of course.

Step 1:  Make a Credible Threat for Fees

Sloan concerned a fight about a company’s stock. The complaint contained a standard array of claims for a stock dispute, including a section 75-1.1 claim.   

In a letter, the defendants’ counsel asked the plaintiffs’ counsel to withdraw the 75-1.1 claim. The defendants’ counsel pointed to the exemption to section 75-1.1 for disputes involving securities transactions. The letter cited eight North Carolina decisions that applied the securities exemption. The letter then asserted that the defendants would seek attorney fees under section 75-16.1 if the plaintiffs refused to withdraw the claim.

The plaintiffs’ counsel wrote back. He argued that the 75-1.1 claim concerned the theft of stock, and not a securities transaction. He also argued that the complaint’s allegations about the defendants’ breach of fiduciary duty constituted independent grounds to support a section 75-1.1 claim.

The defendants filed a motion to dismiss. One week later, the plaintiffs voluntarily dismissed the 75-1.1 claim without prejudice.

The defendants then followed through on their original threat: they filed a motion for attorney fees under section 75-16.1.

Step 2:  Follow Through On the Threat with Well-Established Caselaw

Judge Michael Robinson concluded that the Sloan plaintiffs knew or should have known that their section 75-1.1 claim was frivolous and malicious.

First, Judge Robinson cited back to the North Carolina Supreme Court’s decisions in Skinner v. E.F. Hutton & Co. and HAJMM v. House of Raeford Farms —decisions that established the securities exemption—to show that the plaintiffs raised a frivolous claim. Judge Robinson included block quotes from HAJMM in which the Supreme Court explained the reasons for the exemption.

Judge Robinson then showed that the plaintiffs’ entire complaint concerned the issuance of different types of securities. He quoted HAJMM to confirm that “[s]ecurities transactions are related to the creation, transfer, or retirement of capital.” The complaint in Sloan fell comfortably within that definition.

Judge Robinson then addressed the plaintiffs’ argument that their section 75-1.1 claim concerned a breach of fiduciary duty and therefore fell outside of the securities exemption. In that argument, the plaintiffs relied on a recent Business Court decision called KURE Corp. v. Peterson.

In Kure Corp., the defendants asked for Rule 11 sanctions based on the plaintiff’s assertion of a section 75-1.1 claim, which the defendants argued fell within the securities exemption. The Business Court, however, concluded that existing law warranted the 75-1.1 claim in Kure Corp. for two reasons. First, the claim rested on allegations beyond the purchase and sale of securities. Second, certain North Carolina decisions have upheld 75-1.1 violations based on the breach of a fiduciary duty, which the plaintiff had alleged.

As Judge Robinson pointed out, the complaint in Sloan did not raise any substantive allegations about a breach of fiduciary duty. Indeed, the Sloan complaint did not even include a claim for breach of fiduciary.

Finally, Judge Robinson turned to the timing of the Sloan plaintiffs’ conduct. The plaintiffs’ counsel’s response to defense counsel’s letter stridently accused the defendants of “commit[ting] larceny and theft with impunity.” The letter also asserted that “[t]here is nothing frivolous and malicious about” the 75-1.1 claim. One month later, however, the plaintiffs voluntarily dismissed the claim. At the hearing on the motion, the plaintiffs’ counsel revealed that he waited one month to dismiss the claim because he was waiting to see if, in fact, the defendants would file a motion to dismiss the claim. This sequence and admission confirmed that the plaintiffs knew they asserted a frivolous claim.

On this basis, Judge Robinson concluded that the defendants should be awarded their reasonable attorney fees incurred in defending against the 75-1.1 claim.

Step 3:  Prepare Your Petition for Fees

Judge Robinson ordered that the defendants prepare a petition for fees supported by proper affidavits. Notably, Judge Robinson’s order encouraged defendants’ counsel “to carefully segregate their time and costs associated strictly and solely with opposing Plaintiffs’ UDTP claim” after their receipt of the plaintiffs’ counsel’s letter. 

This point underscores the importance of detailed timekeeping practices if a lawyer believes that her client might be entitled to 75-1.1 fees down the road.

Overall, the Sloan case contains several forceful lessons:

  • A 75-1.1 plaintiff might be responsible for fees if his claim tries to tiptoe around well-established law.
  • Alleging a 75-1.1 claim for leverage, just to see if the claim is opposed, will not help the claimant’s argument against fees. This is an especially significant point, given how many 75-1.1 claims are asserted in North Carolina business litigation.
  • A 75-1.1 defendant who wants to recover fees must be deliberate in her efforts to do so. The deliberate steps should include (1) documenting why the claim is frivolous and malicious, (2) giving the claimant an opportunity to explain himself, and (3) keeping meticulous timekeeping records of these and other efforts to defend the claim.

Judge Robinson’s order contains one additional nugget of intrigue:  a statement that “securities transactions are beyond the scope of section 75-1.1 whether such transactions give rise to a breach of fiduciary claim or not.” As this point and the decision in Kure Corp. suggest, the interplay among the securities laws, the law on fiduciary duties, and section 75-1.1 might be a fertile source for further clarification—perhaps in future motion practice on attorney fees.

Author: Stephen Feldman

The North Carolina Business Court Hands Down an Important Healthcare Antitrust Decision, Part 2

In a recent blog post, we discussed a new antitrust decision from the North Carolina Business Court that involves healthcare providers and health insurers. In that post, we examined the significance of that opinion to indirect-purchaser standing under North Carolina antitrust law. Judge Michael Robinson’s decision in Christopher DiCesare, et al. v. The Charlotte Mecklenburg Hospital Authority d/b/a Carolinas HealthCare is also noteworthy because of its in-depth discussion of the pleading requirements for state antitrust claims under Chapter 75.  We explore Judge Robinson’s treatment of the antitrust claims themselves in this post. But first, let’s review the relevant facts:

Insureds Allege Antitrust Injuries from Contracts between Health Insurers and Hospitals

The plaintiffs in DiCesare are individual North Carolinians that purchased health insurance that covered acute hospital services. The plaintiffs brought the action on behalf of a putative class of all North Carolinians that purchased insurance from four particulars health insurers since January 1, 2013.

The plaintiffs alleged that the defendant, Carolinas HealthCare, maintains a 50% share of the Charlotte-area hospital market.

The plaintiffs accused Carolinas HealthCare of forcing insurers to enter into service contracts that contained provisions that violate state antitrust law. The plaintiffs alleged that the contracts contained “anti-steering” terms that discouraged insurers from providing accurate information to their insureds about treatment alternatives to Carolinas HealthCare.

The plaintiffs claimed that the anti-steering provisions harmed competition because insurers would pay hospitals less if insurers could provide customers with more complete information about their healthcare options. The plaintiffs further alleged that the insurers would pass the savings on to their insureds. Ultimately, plaintiffs contended that individual North Carolinians would pay less for insurance in the absence of the anti-steering contract provisions.

The plaintiffs brought two separate claims: (1) that the contracts were an unlawful contract, combination, or conspiracy in restraint of trade in violation of  N.C. Gen. Stat. sections 75-1, and 75-2; and (2) monopolization in violation of section 75-1.1, 75-2, and 75-2.1.

After the plaintiffs filed an amended complaint, Carolinas HealthCare moved to dismiss for lack of standing pursuant to both North Carolina Rule of Civil Procedure 12(b)(1) and 12(b)(6). Carolinas HealthCare also moved for judgment on the pleadings as to both antitrust claims. Judge Robinson denied both motions, but issued a single opinion that covered both.

In our first post, we discussed Judge Robinson’s determination that the plaintiffs had standing to bring their antitrust claims. In this post, we will discuss the court’s analysis of the substantive antitrust claims.

The Plaintiffs Adequately Pleaded an Unlawful Contract Claim

The part of Judge Robinson’s opinion that decided Carolinas HealthCare’s motion for judgment on the pleadings first addressed the plaintiffs’ unlawful restraint of trade claim. The judge noted that Section 75-1 is based on section one of the Sherman Act. As such, federal decisions applying the Sherman Act are “instructive” in determining if an agreement unlawfully restrains trade under North Carolina law.

Applying Fourth Circuit precedent, Judge Robinson determined that the elements of a restraint of trade claim under North Carolina law are: (1) a contract, combination, or conspiracy; (2) that imposed an unreasonable restraint of trade.

Judge Robinson indicated that the relevant case authorities generally find horizontal restraints on trade (e.g. price-fixing among direct competitors) to be per se unreasonable. By contrast, courts evaluate vertical restraints under a “rule of reason” analysis. The parties agreed that the anti-steering provisions were, as alleged, vertical restraints.

Relying on federal precedent, Judge Robinson indicated that a plaintiff would have to prevail under a very convoluted test in order to prove ultimately an unlawful restraint of trade under the rule of reason. First, the plaintiff must prove an adverse effect on competition in the relevant market. The burden then shifts to the defendant to demonstrate that the challenged agreement has pro-competitive effects. If the defendant is able to prove that the agreement provides a benefit to competition, the burden shifts again. The plaintiff must then prove that any legitimate competitive benefit could be achieved through less restrictive means.

Judge Robinson noted that the Court first had to determine the relevant market before analyzing the competitive effect of the defendant’s challenged activity. The parties did not dispute that the relevant market was the sale of general acute inpatient hospital services to insurers in the Charlotte area. 

Judge Robinson then analyzed whether the plaintiffs had adequately alleged an adverse effect on competition. Judge Robinson required that the plaintiffs first had to plead adequately that Carolinas HealthCare possessed market power within the relevant market. The judge determined that the plaintiffs’ allegations, which included: (1) that Carolinas HealthCare had a market share of approximately 50% of the relevant market; (2) that the hospital’s largest competitor had less than half of Carolinas HealthCare’s annual revenues; and (3) that licensing requirements and acquiring suitable sites for hospitals to build created significant barriers to entry, sufficiently alleged market power.

Finally, Judge Robinson detailed the potential anti-competitive effects flowing from Carolinas HealthCare’s alleged conduct. The plaintiffs had alleged that the anti-steering provisions contained in the insurance contracts had the following anti-competitive effects:

  • Protecting Carolinas HealthCare’s market power and enabling the hospital to charge supercompetitive prices;
  • Substantially lessening competition among service providers;
  • Restricting the introduction of innovative insurance products that could lower prices;
  • Reducing consumer incentives to obtain treatment for more cost-effective providers;
  • Depriving insurers and insureds of the benefits of a competitive market for services;
  • Reducing the number of insurance plans from which consumers can choose.

Judge Robinson held that the plaintiffs’ factual allegations were sufficient to overcome the motion for judgment on the pleadings. The judge did not require the plaintiffs to prove that alleged anticompetitive risks outweighed Carolinas HealthCare’s pro-competitive justifications, which would be the plaintiffs’ ultimate burden under the rule of reason analysis. The plaintiffs only needed to allege sufficient anti-competitive effects of the challenged conduct in order to get past the pleading stage.

The Plaintiffs’ Monopolization Claim Also Survives

Judge Robinson also used federal antitrust precedent in rejecting Carolinas HealthCare’s challenge to the monopolization claim.  Judge Robinson determined that a monopolization claim requires possession of monopoly power in the relevant market and willful maintenance of that power.

Carolinas HealthCare challenged the sufficiency of plaintiffs’ claim that it possessed monopoly power, but did not challenge the adequacy of the willful maintenance allegation. 

Although the plaintiffs bore a higher burden than to allege market power, Judge Robinson found that the plaintiffs’ allegations concerning market power were sufficient to assert monopoly power, too. Judge Robinson noted that the plaintiffs would bear a heavy burden ultimately to prove monopoly power. He recognized that, in other monopolization cases, market share below 50% is rarely evidence of monopoly power and market share between 50% and 70% is only occasionally proof of monopoly power.

Throughout Judge Robinson’s opinion, the judge emphasized the relatively low burden that the plaintiffs possessed at the pleading stage. He expressly noted that pre-discovery dismissals of state antitrust actions are relatively rare. The judge did, however, express some degree of skepticism that the plaintiffs would be able to meet their burden at summary judgment for several aspects of their claims.  Nevertheless, he allowed plaintiffs discovery as to both of their antitrust claims

Judge Robinson’s opinion in DiCesare appears to set a relatively low bar for state antitrust claims to survive to discovery, even where the claims may have a hard time ultimately making it to trial. We will have to see if there is an increase in state antitrust claims as a result.

Author’s Note: In our prior post about DiCesare, we discussed the unusual step that Judge Robinson took to invite Carolinas HealthCare to seek interlocutory review of the judge’s decision on indirect purchaser standing. Carolinas HealthCare took the judge up on his offer. Last Friday, the defendant filed a Petition for Writ of Certiorari to the North Carolina Supreme Court. 

Author: George Sanderson