Can Failing Antitrust Claims Be Repackaged as Unfair Methods of Competition? The North Carolina Business Court Answers No

Although courts sometimes describe N.C. Gen. Stat. § 75-1.1 as an outgrowth of antitrust law, most 75-1.1 claims do not arise from antitrust fact patterns.

SiteLink Software, LLC v. Red Nova Labs, Inc. is an exception. That case involves overlapping antitrust claims and section 75-1.1 claims.

In this setting, the North Carolina Business Court recently held that the outcome of the 75-1.1 claims tracked the outcome of the antitrust claims.

From Collaborators to Competitors

SiteLink provides software to self-storage facilities (the kind you see on Storage Wars). This type of software, called facility-management software, performs management functions for self-storage facilities. Only a minority of storage facilities use facility-management software. Out of that subset, 35% to 40% use SiteLink’s  software.

SiteLink cooperates with companies that provide complementary services, such as online marketing services. Through license agreements, SiteLink allows these companies to tap into SiteLink’s network and data through SiteLink’s application-programming interface (API).

SiteLink, however, imposes licensing restrictions on its software and its API. SiteLink’s licensing agreements bar licensees from competing with SiteLink. The agreements also bar a licensee from buying any services from SiteLink’s competitors at the same time that the licensee uses SiteLink’s products.

Red Nova is an online marketing company. It had a license to use SiteLink’s API to provide services to SiteLink’s customers.

While Red Nova had this licensing relationship with SiteLink, it developed software that competed with SiteLink’s software. When SiteLink learned this, it terminated Red Nova’s API license. It also unilaterally amended its license agreements with its own customers, inserting a provision that barred those customers from dealing with any company that competes with SiteLink in any line of business.

Finally, SiteLink sent letters to its own customers, urging them to switch from Red Nova to another marketing company that did not compete with SiteLink in any sphere. SiteLink’s campaign allegedly included false statements about Red Nova. It also allegedly included coercive incentives for customers to switch away from Red Nova.

Red Nova’s Counterclaims

SiteLink sued Red Nova in North Carolina state court for violating the API license. Red Nova designated the lawsuit to the North Carolina Business Court. The case was assigned to Chief Judge Gale.

Red Nova then filed four counterclaims against SiteLink. One of the counterclaims had this heading: “Unfair and Deceptive Trade Practices; N.C. Gen. Stat. §§ 75-1, 75-1.1, 75-2, 75-2.1.”

As that heading suggests, this counterclaim mixed claims under section 75-1.1 with claims under North Carolina’s state antitrust statutes:

  • section 75-1, which bars certain anticompetitive agreements,
  • section 75-2, which extends section 75-1 to acts and agreements that violate “the principles of the common law,” and
  • section 75-2.1, which bars monopolization, attempts to monopolize, and conspiracies to monopolize.

Red Nova’s antitrust/75-1.1 counterclaim attacked the competition-limiting terms in SiteLink’s API licenses. However, it also attacked SiteLink’s alleged false statements and attempts to coerce Red Nova’s customers to stop using Red Nova.

Given this focus on anticompetitive tactics, Red Nova’s 75-1.1 claim seemed to apply a rarely used aspect of section 75-1.1: its ban on unfair methods of competition.

SiteLink moved to dismiss all of Red Nova’s antitrust claims. It also moved to dismiss Red Nova’s 75-1.1 claim, but only to the extent that the 75-1.1 claim was based on SiteLink’s API licensing practices.

Chief Judge Gale granted SiteLink’s partial motion to dismiss. His extensive opinion discusses several aspects of antitrust law—and the 75-1.1 “unfair methods” theory—that rarely come up in decisions of the North Carolina state courts. Because of this lack of state-court precedents, the opinion draws on federal antitrust decisions throughout.

The court analogized Red Nova’s antitrust theory to a theory of “negative tying.”  Negative tying occurs when a seller agrees to sell a product or service only on the condition that the customer agrees not to buy a different product or service from any other seller, or at least not from specified sellers. (In a conventional tying arrangement, in contrast, the seller imposes a different condition on the sale: he requires that the customer actually buy a second product or service from him.)

The court held that Red Nova’s tying claim omitted at least one element of such a claim: anticompetitive effects in the market for the “tied” services—that is, the market where the seller hopes to coerce or prevent sales. In this case, the allegedly tied market was the market for “other software services offered to self-storage-facility owners or operators.” The court saw no allegations of any effects on that market. For example, Red Nova did not even allege that SiteLink was trying to enter that market.

The court also rejected Red Nova’s claim that the licensing agreements between SiteLink and its customers were anticompetitive in a more general way. Red Nova alleged that these agreements pushed up prices to customers, but the court held that Red Nova’s counterclaim offered no specifics on those alleged price effects.

Red Nova’s claims of monopolization and attempted monopolization failed as well. Those claims required Red Nova to define the allegedly monopolized market, then allege (in non-conclusory terms) that SiteLink had monopoly power (for actual monopolization) or a dangerous probability of gaining monopoly power (for attempt to monopolize). Even if Red Nova’s proposed market definition could survive a motion to dismiss—a point on which the court expressed doubt—the court held that SiteLink’s 35% to 40% market share in this proposed market was not enough to show monopoly power or a dangerous probability of getting it.

Having dismissed all of Red Nova’s antitrust claims, the Business Court also dismissed the 75-1.1 claims to the extent that they were based on SiteLink’s API licensing practices. The court treated these 75-1.1 claims as just another expression of Red Nova’s failed antitrust theories.

In dismissing these 75-1.1 claims, the court held: “When a section 75-1.1 claim derives solely from an antitrust claim, the failure of the antitrust claim also defeats liability under section 75-1.1.” The court based this holding on a 2002 decision by the U.S. District Court for the Middle District of North Carolina.

This is a significant holding. In theory, it would be possible for courts to hold that section 75-1.1 allows parties to pursue antitrust claims that fail one or more standards under antitrust law. In recent years, however, courts have rejected that approach to section 75-1.1. The Business Court has now rejected it as well.

That rejection makes perfect sense. As John Graybeal has pointed out in a helpful article, using section 75-1.1 as an “antitrust lite” statute would pose serious problems. Most importantly, it would require the courts to devise a whole new set of standards to govern these claims. It has taken the federal and state courts 126 years—and considerable struggle—to work out one body of antitrust doctrine. It’s hard to imagine that the North Carolina courts would want to restart that process.

Finally, a word about Red Nova’s surviving 75-1.1 claims. As noted above, SiteLink moved to dismiss Red Nova’s 75-1.1 claim only to the extent that it was based on SiteLink’s API license. The motion to dismiss left the rest of Red Nova’s 75-1.1 claim unchallenged.

Thus, the court and the parties now face the challenge of untangling the strands of Red Nova’s single counterclaim—a counterclaim that (wisely or not) combined section 75-1.1 with state antitrust law. This untangling process might well offer more lessons for all of us.

Author: George Sanderson

With Bank Fees, the Unfairness or Deception Is in the Details

Bank and financing fees are a prime target for alleged violations of N.C. Gen. Stat. § 75-1.1. Indeed, one of the seminal cases on section 75-1.1 concerns fees charged in a refinance transaction.

Of course, the fact that a bank, lender, or any other financing company charges a fee is not inherently unfair or deceptive. A consumer who accuses a bank of a 75-1.1 violation based on a fee needs to show why the fee was unfair or deceptive. The “why” inquiry is likely to require a careful study of any agreement that concerns the fee.

A recent decision from the North Carolina Court of Appeals, Gay v. Peoples Bank, underscores this point. This post reviews the Gay decision.

One Checking Account, Six Agreements

The case concerned multiple overdraft charges that Peoples Bank charged a customer named Joseph Lee Gay.

Gay opened a checking account with the bank in July 2008. To open that one account, Gay had to sign six separate agreements. A central question in his lawsuit was whether the bank violated those agreements.

Gay first argued that the bank breached one of the agreements—an agreement about electronic fund transfers—by reordering the sequence of certain electronic debit transactions over multiple days. That reordering, he contended, led to an overdraft charge. Gay argued that the agreement about electronic fund transfers required the bank to process debit transactions in chronological order.

Second, Gay argued that the bank breached two other agreements—one called an addendum, and the other called “the No Bounce Advantage” agreement—when the bank posted electronic debits to his account in order of size, from high to low. That is, the bank paid the largest debits first. According to Gay, the agreements allowed the bank to post only negotiable instruments, and not electronic debits, from high to low.

Finally, Gay alleged that the bank charged improper overdraft fees on an account with a positive balance. Those fees, he contended, violated the bank’s agreements.

Based on these allegations, Gay asserted five different claims, including a 75-1.1 claim. He asserted the claims on behalf of a putative class.

The case made its way to the Honorable Louis A. Bledsoe, III, of the North Carolina Business Court. Judge Bledsoe ultimately entered summary judgment in the bank’s favor.

Gay appealed that decision. Because the case was filed before October 1, 2014, the appeal was resolved by the North Carolina Court of Appeals, not by the North Carolina Supreme Court.

Finding Finality in the Fine Print

The Court of Appeals affirmed Judge Bledsoe’s order. In doing so, the court closely reviewed the agreements on the allegedly problematic fees.

The Court of Appeals first addressed Gay’s arguments about the sequencing of electronic debit transactions. The court stated that the agreement did not say that electronic payments would be posted instantaneously. Instead, the agreement said only that a transaction would be treated as an immediate withdrawal.

The provision’s purpose, the court explained, was to give customers notice of what their account balances would be after transactions. The provision did not signal that transactions would be posted instantaneously. Because the agreement did not contain any affirmative statements about a posting sequence, the court rejected Gay’s argument that the bank wrongly imposed an overdraft charge.

The Court of Appeals next addressed Gay’s argument that certain agreements called for the bank to post negotiable instruments, but not electronic debits, from high to low.

One of the two agreements at issue called for the bank to pay “items” drawn on an account from largest to smallest. The second agreement said that the bank generally pays electronic transactions, then checks beginning with the highest dollar amount. According to the Court of Appeals, these agreements, read together, unambiguously show that the bank could post all transactions—including checks, ATM withdrawals, and debit-card payments—in high-to-low order.

Lastly, the Court of Appeals rejected Gay’s argument that issues of fact remained on whether the bank charged overdraft fees on accounts with positive balances.

Gay argued that the bank wrongfully charged an overdraft fee on a positive account on August 21, 2008, but Gay never produced a notice of insufficient funds from that date. Gay made the same argument about an overdraft fee on his January 9, 2012, account statement, but Gay’s evidence showed that the bank processed that fee on the day after Gay overdrew the account. Gay’s own evidence therefore defeated his claim.

The Fine Print Is Not Unfair

Having concluded that the bank agreements did not support Gay’s claims, the Court of Appeals turned to a different, but related question: Could the bank’s alleged conduct, including its imposition of fees, nonetheless violate section 75-1.1?

Unsurprisingly, the court said no. The court’s reasoning, however, merits study.

The Court of Appeals emphasized that the plain language of the account agreements put Gay on notice of the bank’s policies, and that the bank’s actions were consistent with those policies. In relying on the absence of a contract breach, the Court of Appeals appears to have understood Gay’s 75-1.1 claim as a “substantial aggravating circumstances” claim. The court did not reach the question whether this case involved aggravating circumstances, because Gay didn’t show a contract breach by the bank in the first place.

Gay also argued that even if the agreements fully disclosed the bank’s conduct, that conduct was nonetheless unfair and/or deceptive in violation of section 75-1.1. He pointed out that other courts around the country have found similar overdraft practices to be unfair or deceptive. When he made this broad argument, Gay did not point to any specific type of 75-1.1 violation.

The Court of Appeals could have deflected this argument by showing that Gay’s 75-1.1 claim was, at most, a substantial-aggravating-circumstances claim, and that the theory failed because Gay did not prove a contract breach.

Instead, the Court of Appeals took a different approach. The court pointed out that, unlike the plaintiffs in the cases that Gay cited from other jurisdictions, Gay could not prove any claim outside section 75-1.1. That fact, the court concluded, meant that Gay could not make out a 75-1.1 claim.

In this reasoning, the Court of Appeals interpreted Gay’s 75-1.1 claim as alleging a per se violation, rather than a direct-unfairness claim. A per se claim converts a violation of another conduct standard into a violation of section 75-1.1. A direct-unfairness claim, in contrast, asks—on a stand-alone basis—whether alleged conduct was unfair.

Here, even if Gay had expressly invoked a direct-unfairness theory, he would have faced a different argument: his claims are probably really deception claims, given that they’re about statements that the bank made to Gay. A deception claim requires actual and reasonable reliance. Those elements are hard to prove. Indeed, the conclusions of the Court of Appeals about the plain language of the agreements would make it especially hard for Gay to prove these elements.

What’s the takeaway, then?

Plaintiffs who want their claims analyzed as direct-unfairness claims would be wise to say clearly that they’re alleging a direct-unfairness claim. If they don’t, their claims might well be analyzed under other—perhaps unfavorable—standards.

This takes us back to where we started. Banking fees might be natural targets for 75-1.1 claims, but crafting a successful claim based on those fees requires a detailed review of the relevant contracts and a well-defined theory of liability.

Author: Stephen Feldman

Treble-Damage Awards as Penalties

Plaintiffs who prove violations of N.C. Gen. Stat. § 75-1.1 are automatically entitled to treble damages under N.C. Gen. Stat. § 75-16. The automatic trebling of damages for 75-1.1 claims often leads to substantial verdicts and settlements. It raises several questions:

  • Why are plaintiffs allowed to automatically recover treble damages?
  • Are treble-damage awards meant to penalize parties who violate section 75-1.1?
  • Alternatively (or in addition), are treble damages meant to remedy the harm that section 75-1.1 violations inflict on plaintiffs?
  • Why do the purposes for imposing treble damages matter?

A recent decision from the U.S. District Court for the Eastern District of North Carolina gives us an occasion to study the purposes for treble-damage awards and the potential due-process issues that arise in this setting.

In Woodson vs. Allstate Insurance Co., Judge Terrence W. Boyle awarded treble damages against an insurer as a penalty for a bad-faith settlement of an insurance claim. The plaintiffs sued after their insurance carrier denied their flood-insurance claim. The plaintiffs’ house was in the path of Hurricane Irene; they claimed that the hurricane severely damaged their home. The insurance company denied the claim. It maintained that all of the damage to the home existed before the hurricane hit.

After a bench trial, Judge Boyle found that the hurricane was the sole cause of the damage to the home. He ruled from the bench that the refusal to pay the claim not only breached the flood insurance contract, but also showed bad faith.

The court credited the testimony of a structural-engineering expert that the homeowners and the insurance company retained jointly. The expert unequivocally found that the hurricane was the sole cause of the claimed damage to the house. The court’s finding of bad faith stemmed mainly from the insurance company’s proffer of an expert report that claimed that all the damages occurred before the hurricane. The jointly appointed expert roundly discredited that report at trial.

In a written decision after the trial, Judge Boyle held that the insurance company’s bad-faith refusal to pay the claim was an unfair trade practice that violated section 75-1.1. As a result of the violation, Judge Boyle trebled the damages connected with the breach of the insurance contract.

Punitive or Remedial?

Judge Boyle held that the insurance company’s conduct violated section 75-1.1. He observed that the federal flood insurance program showed “an avowed federal interest” for providing relief for meritorious flood claims. He wrote that “it is important to send a message that . . . bad faith denials will not be tolerated.”

As this language shows, the court appeared to impose treble damages to penalize the insurer for its bad-faith claims handling. This use of treble damages to penalize the insurer raises an interesting question: Is the purpose of imposing treble damages punitive, remedial, or both?

The North Carolina Supreme Court has written that allowing treble damages for violations of section 75-1.1 has both punitive and remedial purposes. The remedial purposes include (1) encouraging private enforcement of section 75-1.1 and (2) creating incentives for settlement.

One might ask whether these purposes really show that section 75-1.1 is non-punitive. What prompts a plaintiff to sue and prompts a defendant to settle a defensible case, after all, is the degree of probability of a large judgment and the magnitude of the predicted judgment. These factors are the same whether one calls the predicted judgment remedial or punitive.

The Supreme Court’s statement that treble-damage awards are partly remedial might be motivated by concerns over the constitutionality of any other outcome. If section 75-1.1 were considered solely punitive, that outcome would expose section 75-1.1 to the charge that it is too vague to satisfy due process, given the vagueness of the conduct standard under the statute. Courts usually reserve vagueness challenges for punitive statutes.

This brings us back to the court’s treble-damages award in Woodson. Is that award subject to a due-process attack because the court sought to penalize the insurer through treble damages?

Probably not. Although Judge Boyle referred only to punitive reasons for imposing treble damages, his decision is also consistent with the remedial purposes of section 75-1.1, as currently framed in the case law. As noted above, a plaintiff’s incentive to sue, and a defendant’s incentive to settle, are not affected by the labeling of the remedy.

In addition, it would be especially hard for an insurer to mount a vagueness attack against a bad-faith-based 75-1.1 claim. The plaintiff in Woodson alleged a per se violation of 75-1.1, invoking the explicit statute that governs settlements of insurance claims. That statute condemns several specific practices. The forbidden practices include an insurer’s failure to settle claims promptly where liability is reasonably clear. It also condemns compelling an insured to litigate by offering substantially less than the amount that the insured ultimately recovers.

The factors that walled off a vagueness defense in Woodson, of course, wouldn’t be present in all fact patterns that generate 75-1.1 claims. Given the wide variety of section 75-1.1 claims, the large damages that are often involved, and the questionable reasoning that has defeated vagueness challenges so far, we might expect more potent vagueness challenges in the future.

Author: George Sanderson