Crash into Me? Not If You Want to Sue Me for Unfair Trade Practices

Does N.C. Gen. Stat. § 75-1.1 allow a lawsuit by a remote user of a product—a user who had no involvement in buying the product? A federal court in North Carolina recently answered no.

An unusual fact pattern for a 75-1.1 case

Early one morning, Danielle Washington was driving to work. She fell asleep at the wheel and crashed into a guardrail, suffering serious injuries. Ms. Washington later discovered that she hit an ET Plus® guardrail. Trinity Industries, the manufacturer of this guardrail system, describes it as “a federally accepted energy-absorbing guardrail end terminal system used on roadways.”

Ms. Washington sued Trinity, alleging that the guardrail was defective and dangerous. Indeed, she alleged that Trinity had changed the design of the guardrail in a way that made it more dangerous, while concealing the effects of these changes from federal regulators. Based on this alleged concealment, in 2014, a jury in the U.S. District Court for the Eastern District of Texas held Trinity liable under the federal False Claims Act.

Unsurprisingly, Ms. Washington sued Trinity in the Eastern District of Texas—the same federal court where Trinity had been held liable for false claims. That court, however, transferred the case to the Middle District of North Carolina, the location of Ms. Washington’s home and the site of the accident. The case was assigned to District Judge Loretta Biggs and Magistrate Judge Patrick Auld.

After the transfer, both sides saw potential benefits from applying North Carolina law, at least on points of their choosing. The defendants argued that North Carolina’s contributory-negligence rule barred Ms. Washington’s claims.

Ms. Washington, on the other hand, sought to amend her complaint to add a claim under section 75-1.1. Trinity opposed the motion to amend, arguing that the proposed amendment would be futile. In an opinion on that motion, Judge Auld held that the proposed 75-1.1 claim failed at the threshold.

Ms. Washington’s proposed 75-1.1 claim raises several interesting questions, including these:

  • Are violations of the federal False Claims Act per se violations of section 75-1.1?
  • Are false statements to government regulators—whether or not they support a deception claim—inherently unfair?
  • Is it ever possible for a remote “user” of a regulated product to rely on undisclosed statements to government regulators? If so, when?
  • Can a plaintiff recover personal-injury damages—times three—through a 75-1.1 claim?

On Ms. Washington’s motion to amend, some, but not all, of these questions arose. In the end, though, the court found other questions dispositive:

  • In a case like Washington (as opposed to a business-vs.-business case), must one be a “consumer” to sue a product manufacturer? The court answered yes.
  • If so, does a remote user of a product qualify as a consumer? The court answered no.

Consumers only, please

The court began its analysis by reviewing section 75-16, the main remedial statute for section 75-1.1. That statute allows a claim by “any person [who] shall be injured.” Reviewing earlier decisions, the Washington court stated that courts have generally interpreted “any person” to mean “consumers.” The court defined a consumer as someone who has “participate[d] in an exchange of value as a purchaser of some item.”

To try to broaden the set of eligible plaintiffs, Ms. Washington relied on two earlier decisions that arguably expanded the range of 75-1.1 plaintiffs beyond buyers and sellers. 

In Hyde v. Abbott Laboratories, Inc., the North Carolina Court of Appeals held that indirect purchasers of products—not just customers who deal directly with a defendant—might be able to recover damages under section 75-16. The Hyde court concluded that the legislature intended to extend recovery to “any person who suffers an injury,” whether or not “that person purchased directly from the wrongdoer.”

The Washington court distinguished Hyde because Ms. Washington never bought the guardrail at issue—directly or indirectly. Because she never “exchange[d] value” for the guardrail, she was a far more remote plaintiff than the Hyde plaintiffs were.

Ms. Washington also cited the North Carolina Supreme Court’s 2007 decision in Walker v. Fleetwood Homes of North Carolina, Inc. That case involved an allegedly defective mobile home. The plaintiff planned to live in the mobile home and make the monthly payments. Even so, it was the plaintiff’s father who made the initial down payment—the only money that had exchanged hands at the time of the complaint. 

The defendant in Walker argued that only the father had suffered an injury that allowed him to sue under section 75-1.1. The North Carolina Supreme Court, however, disagreed. According to the court, the daughter was injured by the defendant’s alleged misdeeds, because she was the intended owner of the home and she intended to make monthly payments on the home. 

In Washington, the court distinguished Walker as another case that involved a “purchase scenario.” Unlike the daughter in Walker, Ms. Washington did not “select, transact for, or plan to make payments” for the guardrail that allegedly harmed her.

By distinguishing these decisions, the Washington court underscored its conclusion that, to sue under section 75-1.1, a non-business plaintiff must be a consumer.

A downstream user is not a consumer

That conclusion doomed Ms. Washington’s proposed 75-1.1 claim.

Ms. Washington admitted that she did not buy the guardrail in question. Even so, she alleged that that she fell within the intended scope of recovery under section 75-1.1 because the defendants “anticipat[ed] and fore[saw]” that their products “would be impacted by members of the driving public.” Implicitly rejecting this theory, the court held that Ms. Washington “does not qualify as a ‘consumer.’”

Washington continues a trend of unsuccessful 75-1.1 claims by plaintiffs who are remote from a defendant’s alleged wrongdoing. We will watch to see whether any of the court’s reasoning migrates into business-vs.-business cases under section 75-1.1—a category that the court’s reasoning did not explicitly cover.

Author: Jeremy Falcone

Breaches of covenants not to compete as unfair and deceptive practices? The North Carolina Business Court weighs in

When does a breach of a covenant not to compete violate N.C. Gen. Stat. § 75-1.1? Is tortious interference a per se violation of section 75-1.1? Departing-employee cases often raise both questions, but the answer to each question remains unsettled.

The North Carolina Business Court weighed in on both of these questions in a recent decision. In Sandhills Home Care, L.L.C. v. Companion Home Care—Unimed, Inc., the court held that allegations that stated tortious-interference claims also stated a 75-1.1 claim. The court also held that a conspiracy to violate covenants not to compete qualifies as unfair and deceptive.

Sandhills accuses Companion of poaching employees and clients

The plaintiff, Sandhills Home Care, provided home-health-care services. Sandhills’s employees provided one-on-one care to clients in the clients’ homes.

Each of Sandhills’s employees entered into an employment agreement. Each employee agreed that, for a stated period of time, he or she:

  • Would not compete with Sandhills;
  • Would not solicit services to clients or prospective clients of Sandhills; and
  • Would not solicit, or attempt to solicit, other Sandhills employees to end their Sandhills employment.

The corporate defendant in the case, Companion Home Care, competed with Sandhills in the same geographic area. Two of the individual defendants were former Sandhills office managers who went to work for Companion. The managers had access to Sandhills’s confidential information, including which employees were serving which clients and the types of services that each employee provided.

Sandhills alleged that the office managers used this confidential information to conspire with Companion to solicit employees to leave Sandhills and work for Companion. Sandhills alleged that those employees, in turn, convinced their clients to switch to Companion.

In the wake of these events, Sandhills sued Companion, its president, the former office managers, and the employees who went to work for Companion. Sandhills alleged that the employees breached their employment agreements.

Sandhills also alleged that Companion encouraged the individual defendants to breach their employment contracts, allegedly in a “malicious and blatant attempt” to destroy Sandhills’s business. Based on this conduct, Sandhills alleged tortious interference and violations of section 75-1.1.

Companion, its president, and the two managers moved to dismiss. They argued that the employees’ covenants not to compete were unreasonable, so the employment agreements at issue were unenforceable.

Business Court Judge Gregory McGuire agreed that the parts of the covenants that barred the employees from competing with Sandhills were overly broad. On the other hand, the court decided that the restrictions against solicitation of Sandhills’s current clients, and against inducing employees to leave Sandhills, largely protected Sandhills’s legitimate interests. The court mostly upheld these non-solicitation and non-inducement provisions.

Having upheld most of the employment covenants, the court declined to dismiss the tortious-interference claims. The employment contracts, after all, were the key contracts with which Companion allegedly interfered.

The 75-1.1 claim survives dismissal

The court also declined to dismiss Sandhills’s 75-1.1 claim.

The court wrote: “Since [Sandhills] has adequately alleged that Companion tortiously interfered with [Sandhills’s] customer relationships and with its former employees’ restrictive covenants, Defendants’ motion to dismiss . . . must be rejected.”

This statement implies that tortious interference is a per se violation of section 75-1.1. That question remains unsettled in North Carolina, even after the North Carolina Supreme Court’s recent decision in Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC. The Business Court, however, silently resolved any doubts on this point in favor of Sandhills.

The court also wrote that the allegation that the defendants conspired to entice Sandhills employees to work for Companion and bring patients to Companion “supports an inference of unfair and deceptive behavior that offends public policy.” In this phrase, the court suggested that such a conspiracy—independent of its role as tortious interference—states more than one type of 75-1.1 claim.

The fact pattern that Sandhills alleged is relatively common in departing-employee cases. If litigants follow the decision in Sandhills, we can expect to see more allegations of conspiracies and allegations of tortious interference in these cases. Under the Business Court’s reasoning, these allegations can give life to a 75-1.1 claim.

Author: George Sanderson

High Prices = Unfair Trade Practices?

Does N.C. Gen. Stat. § 75-1.1 ever support liability simply because the price of a good or service is too high?

To our surprise, a recent decision from the U.S. District Court for the Eastern District of North Carolina answers “maybe so.”

In Respess v. Crop Production Services, Inc., Senior District Judge W. Earl Britt denied a motion to dismiss a section 75-1.1 claim that involved, in the words of the complaint, “the practice of overcharging.”

If “overcharging” sounds familiar in this context, it’s because the North Carolina Supreme Court addressed that issue in Bumpers v. Community Bank of Northern Virginia. In Bumpers, the Supreme Court rejected the argument that fees charged in connection with a mortgage refinancing were so high as to violate section 75-1.1.

Although Bumpers did not categorically reject 75-1.1 claims based on “overcharging,” the decision made clear that a 75-1.1 claim about high prices would be hard to prove—especially if the claimant paid the allegedly excessive price by choice.

Given Bumpers, how did the “overcharging” claim in Respess survive a motion to dismiss? This post answers that question.

Finding Normal

The Respess plaintiffs own and operate farms in and around Beaufort County. Their complaint alleges that, over the last four years, Crop Production Services, Inc., sold the plaintiffs agriculture supplies. The plaintiffs bought these supplies at CPS’s store in Belhaven. CPS has stores throughout North Carolina.

The Respess complaint accuses CPS of charging the plaintiffs “excessive amounts” for the farm supplies. The complaint lists six different products that the plaintiffs bought from CPS at prices that were 53 percent to 86 percent “higher than normal pricing.”

The complaint, however, does not explain what “normal pricing” means.

The complaint also does not define other concepts that appear significant. In particular, the complaint calls CPS’s “overcharging” “systematic,” but does not say what “systematic” means. The complaint also says that the plaintiffs “have relied” on CPS to provide supplies, but it does not elaborate on the nature of the reliance.

The plaintiffs sued CPS in North Carolina state court. CPS removed the case to federal court and filed a motion to dismiss.

In the motion, CPS argued that charging different prices to different customers does not violate section 75-1.1. CPS mainly relied on a single decision: the 1999 decision by the North Carolina Court of Appeals in Van Dorn Retail Management Inc. v. Klaussner Furniture Industries. In Van Dorn, the Court of Appeals held that a supplier of goods does not violate section 75-1.1 by charging different prices to different customers. CPS argued that Van Dorn required the dismissal of the plaintiffs’ 75-1.1 claim.

CPS also argued that the plaintiffs’ theory would hamstring CPS’s ability to consider multiple factors when it sets prices at each of its stores. These factors include (1) the type of customer who frequents a particular store, (2) the product volume purchased at the store, (3) whether CPS provided services along with supplies at the store, and (4) competitors’ prices.

Notably, CPS’s motion and brief did not cite or refer to Bumpers.

A Matter of Perspective

On July 13, Judge Britt denied CPS’s motion to dismiss. His order, like CPS’s papers, made no mention of Bumpers.

Instead, Judge Britt’s order centered on Van Dorn. He concluded that Van Dorn did not control the case because, in his view, the plaintiffs’ 75-1.1 claim was not about price discrimination. Instead, Judge Britt characterized the claim as being “premised on the notion that [the plaintiffs] were routinely charged prices higher than the amount of money they owed.”

What, then, was “the amount of money they owed”?

Judge Britt answered that question by pointing to the complaint. The complaint alleges that the plaintiffs paid greater than “normal pricing” for CPS’s supplies. Judge Britt interpreted “normal pricing” to refer to CPS’s prices at stores other than the Belhaven store. However, neither the complaint nor Judge Britt’s order actually says whether CPS’s prices are the same at all stores statewide. The complaint merely alleges (on information and belief) that CPS sets “the pricing of products . . . for its various locations throughout North Carolina.”

Rather than viewing these allegations through a lens of price discrimination, Judge Britt described the allegations as involving “systematic overcharging.” He cited Sampson-Bladen Oil Co. v. Walters for the proposition that section 75-1.1 outlaws “systematic overcharging.” He denied CPS’s motion to dismiss on this basis.

Understanding Overcharging

Respess draws a distinction between price discrimination and “systematic overcharging.” But how sharp is that distinction, at least in Respess?

CPS would argue that the distinction is hazy at best. For an “overcharging” claim to have legs, the claimant must have paid a price over and above some other price. In Respess, the Belhaven CPS store allegedly charged prices higher than CPS charged to customers at other stores.

In other words, the complaint alleges that CPS charged different prices to different customers. CPS would argue that that’s the very definition of price discrimination—and that Van Dorn therefore applies squarely.

CPS might also argue that, whatever the complaint means by “systematic overcharging,” the allegations in Respess bear no resemblance to the facts in Sampson-Bladen.

In Sampson-Bladen, a seller of oil charged a buyer for more oil than the seller actually delivered. The Respess plaintiffs, in contrast, have not alleged that CPS charged the plaintiffs for supplies that CPS didn’t deliver. Instead, the plaintiffs allege that CPS sold the plaintiffs exactly what they ordered, but at prices that the plaintiffs believe are too high.

Which takes us back to Bumpers. In Bumpers, the plaintiffs alleged that fees that they paid in connection with refinancing transactions were just too high. The Supreme Court concluded that that claim, as a matter of law, did not violate section 75-1.1. The Supreme Court pointed to the fact that the plaintiffs entered into their loan transactions freely and knew that other closing agents for the transactions might charge lower fees.

After Bumpers, section 75-1.1 is unlikely to condemn the sale of a good or service  in a free-market transaction. Do the purchases of farm supplies in Respess fit this description?

That question might frame a future summary-judgment motion.

Author: Stephen Feldman