Can Extensive Regulations Bar a Claim for Unfair Trade Practices?

In the fall of 2015, we wrote about a case between two sports agents. The suit concerned the decision by Robert Quinn, a former football standout at the University of North Carolina, to switch agents.

The U.S. District Court for the Middle District of North Carolina entered summary judgment against the spurned agent, Champion Pro Consulting Group. An appeal followed.

In this post, we discuss the Fourth Circuit’s opinion in Champion Pro v. Impact Sports Football – an opinion that affirms the district court’s ruling.

The opinion contains several important points for complex-business litigators. This post focuses on one issue: whether a claim for violation of N.C. Gen. Stat. § 75-1.1 fails as a matter of law when the allegedly wrongful conduct is already subject to an extensive regulatory regime.

A Six-Figure Payment, and a Change in Agents

In December 2010, Quinn signed a contract with Champion. Half a year later, Quinn terminated that contract and instead signed with Impact Sports. Quinn also received $100,000 from Impact.

In January 2012, Champion’s founder, Carl Carey, filed a grievance with the NFL Players Association. Carey alleged that Quinn breached the contract between Quinn and Champion. The case went to arbitration, and Carey received an award of $17,500.

Carey and Champion then sued Impact in federal court. The lawsuit raised multiple claims, including an alleged violation of section 75-1.1.

After discovery, Impact filed a motion for summary judgment. The district court granted the motion.

Regulatory Regimes, Unfair-Trade-Practice Claims, and Policy Considerations

In its appeal, Champion argued that Impact violated section 75-1.1 in three ways.

First, Champion contended that Impact illegally used “runners” to recruit Quinn. A “runner” is someone who offers money or other benefits to a player to secure the player as an agent’s client.

Second, Champion argued that Impact’s $100,000 payment to Quinn induced Quinn to breach his contract with Champion.

Third, Champion said that Impact’s conduct constituted unlawful retaliation.

The Fourth Circuit rejected each of these arguments. In doing so, the Fourth Circuit relied on a broad principle: section 75-1.1 does not apply to matters that are already subject to pervasive and intricate regulation.

In this case, the record reflected that the NFLPA regulates conduct of agents like Champion and Impact. In particular, the NFLPA’s regulations prohibit dishonest and fraudulent conduct in agents’ dealings with players. The regulations also permit monetary damages, and they require the arbitration of disputes.

In the Fourth Circuit’s view, section 75-1.1 does not reach conduct that is subject to regulations like those of the NFLPA. The court listed three policy reasons to support its conclusion.

First, the Fourth Circuit suggested that public policy does not favor conduct being subject to “overlapping” regulation – though the court did not clarify whether its concern was inconsistent regulations, duplicative regulations, or both.

Second, the Fourth Circuit voiced concern that the standards of section 75-1.1 could disrupt “the practical workings of th[e] industry.” Here, the Fourth Circuit pointed out that payments like the $100,000 payment from Impact to Quinn are an accepted part of doing business in the industry.

Third, the Fourth Circuit opined that section 75-1.1 was not needed here to correct any imbalance of power among the parties. In stating this opinion, the Fourth Circuit cited to one of its earlier decisions, Food Lion, Inc. v. Capital Cities/ABC, Inc., for the proposition that the fundamental purpose of section 75-1.1 “is to protect the consumer.” 

Asserting a “Regulatory Regime” Defense

The decision in Champion Pro is potentially an important one for businesses and business litigators alike.

Perhaps most importantly, Champion Pro instructs that, when conduct is already subject to regulation, the existing regulations might require dismissal of a section 75-1.1 claim as a matter of law. In Champion Pro, the existing regulations were found in a private code of conduct. Given that conduct is often subject to multiple standards (whether private, public, or both), Champion Pro might well embolden defendants to assert more aggressively an “extensive regulatory regime” defense when facing section 75-1.1 claims.

Defendants who raise this defense might be well-served to measure whether and how the policy considerations enunciated in Champion Pro apply to their cases. In particular:

  1. How significant is the overlap between the existing regulatory regime and section 75-1.1?
  1. Might the application of section 75-1.1 change a key feature of the industry —a feature not proscribed by the existing regulatory regime?
  1. Does the case involve any consumer-like behavior?

As Champion Pro illustrates, a business must surmount a high bar to prove a section 75-1.1 claim against a competitor. This is especially true when the parties compete in an extensively regulated market.

Author: Stephen Feldman

Can a company violate Chapter 75 simply by investigating potential trademark infringement?

When a company investigates potential trademark infringement, what tactics can the company use without the investigation running afoul of North Carolina’s Unfair and Deceptive Trade Practices Act?

The Fourth Circuit Court of Appeals recently explored this question in Exclaim Marketing, LLC v. DirecTV, LLC.

Tracking down a potential infringer

DirecTV provides television service via satellite (DirecTV is now affiliated with AT&T).  DirecTV sometimes contracts with retailers to sell DirecTV’s service.  DirecTV’s agreements with retailers generally prohibit retailers from contracting with third parties that DirecTV has not authorized.

Exclaim Marketing provides customer leads. Exclaim owns telephone numbers throughout the United States.  Consumers may place orders for different types of goods and services through those numbers. Although not authorized by DirecTV, Exclaim contracted to provide leads to several DirecTV retailers.

To generate leads, Exclaim would buy listings for its phone numbers in conventional telephone directories (Yellow Pages ads, for instance). Exclaim’s listings did not identify the company by name. Instead, Exclaim’s listings usually only included a generic term such as “satellite television.” Exclaim did include “DirecTV,” or a variant, in a small number of its listings.

When a prospective satellite TV customer called one of Exclaim’s listings, the call would be routed to Exclaim’s call center. A telemarketer would determine if the customer was calling about satellite TV and, if so, forward the potential customer’s call to a satellite TV retailer.

In time, DirecTV discovered Exclaim’s directory listings. DirecTV viewed the inclusion of its name in some listings as a trademark violation, as well as a potential violation of its retailer contracts. DirecTV launched an investigation to determine who owned the listings.

As part of its search, DirecTV’s investigators called the numbers in Exclaim’s directory listings. On occasion, DirecTV’s investigators would provide false names to Exclaim’s telemarketers.  The telemarketers sometimes hung up if an investigator identified as working for DirecTV.

DirecTV ultimately identified Exclaim as the owner of the infringing listings. When confronted, Exclaim removed some of the listings, but DirecTV continued to discover infringing listings for several years after identifying Exclaim.  In turn, DirecTV continued to place calls, to both infringing and “generic” listings, over several years.  DirecTV continued to make calls both to investigate whether Exclaim was continuing to infringe and whether DirecTV’s retailers were still continuing to conduct business with Exclaim.

Exclaim brings to trial claims that DirecTV’s calls were unfair and deceptive

Exclaim ultimately sued DirecTV. Exclaim alleged that DirecTV wrongfully threatened retailers to induce them to not work with Exclaim. Exclaim further contended that DirecTV’s ongoing phoning of Exclaim’s listings was malicious and not for any legitimate business purpose. 

Exclaim asserted claims for tortious interference of contract and defamation. Exclaim also asserted that DirecTV’s multiple calls over repeated years violated N.C. Gen. Stat. § 75-1.1. Exclaim alleged that DirecTV’s actions were both unfair and deceptive.  Although not designated as such, Exclaim 75-1.1’s claims sounded both in direct unfairness and deception.

DirecTV counterclaimed for trademark infringement under the Lanham Act.

Although its other claims were dismissed, Exclaim’s 75-1.1 claim survived both a 12(b)(6) motion and a motion for summary judgment

Three years after Exclaim filed the original complaint, Exclaim’s 75-1.1 claim and DirecTV’s Lanham Act claim went to trial in the United States District Court for the Eastern District of North Carolina. At trial, Exclaim alleged that multiple practices by DirecTV violated 75-1.1. The jury, however, expressly found that DirecTV engaged in only one wrongful practice:  DirecTV telephoned Exclaim’s “call center over 175 times over a six year period, at times using false names.”  The jury found that DirecTV’s conduct caused proximate harm to Exclaim and that Exclaim was entitled to $760,000.00 in damages (before trebling).

The jury also found that Exclaim had infringed on DirecTV’s trademark and awarded DIRECTV $25,000.00.

Post-verdict, DirecTV moved for judgment as a matter of law. United States District Court Judge Louise Flanagan granted the motion, ruling that the jury’s finding did not support a 75-1.1 claim. She concluded that the phone calls to Exclaim were not “in or affecting commerce,” nor did they constitute an unfair or a deceptive practice.

On the other hand, the district court increased the jury’s award to DirecTV to $610,560.00 for disgorgement of Exclaim’s profits from the infringing activity.

The Fourth Circuit Affirms on Appeal

Exclaim appealed Judge Flanagan’s decision.  In a per curiam opinion after oral argument, the Fourth Circuit wholly affirmed the district court.

With respect to Exclaim’s 75-1.1 claim, the appellate court analyzed whether DirecTV’s call history met the definition of either an unfair or deceptive practice.

First, the court analyzed whether DirecTV’s conduct was statutorily unfair. As to the direct-unfairness claim, the court broadly defined an unfair practice to include conduct (1) that “a court of equity would consider it to be unfair” and (2) that “offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.”

The court expressed doubt that the placing of telephone calls to publicly disseminated telephone listings could ever be an unfair practice. The court also opined that DirecTV’s ongoing infringement investigation was a “legitimate business purpose” for placing calls. The court determined that DirecTV’s actions were fair especially because DirecTV continued to find infringing listings for years after Exclaim was initially identified as the source.

The court also did not consider DirecTV’s conduct to be deceptive. The court did not find inherent deception in the jury’s finding that DirecTV placed the calls to Exclaim.  The court was not troubled even though DirecTV’s investigators falsely posed as potential customers and gave false names to Exclaim’s telemarketers.

DirecTV’s investigators testified that Exclaim’s telemarketers would stonewall or hang up on them if they identified themselves as DirecTV’s agents.  The court found DirecTV’s use of false names was therefore “intrinsically linked” to investigating the source of infringing listings.

Because the Fourth Circuit found that Exclaim’s claim failed to meet the definition of either an unfair or a deceptive practice, the court declined to address the district court’s determination that DirecTV’s conduct was not in or affecting commerce.

A win, but a cautionary tale

The Fourth Circuit’s decision appears to broadly protect a company’s investigatory activities linked to a “legitimate” business purpose, but section 75-1.1 still serves potentially to chill such activity.  In DirecTV’s case, even though the company prevailed on appeal, 75-1.1 liability remained a constant threat throughout years of litigation. Likewise, even in the course of broadly insulating DirecTV’s conduct, the Fourth Circuit reiterated a broad standard for direct unfairness claims. A company that undertakes an investigation into the activities of another company should remain aware of these risks.

Note: Ellis & Winters represents DirecTV, LLC, but did not represent the company in the Exclaim case.

Author: George Sanderson

The Economic-Loss Rule: Conflicting Signals

As we have discussed before, courts in North Carolina have not agreed on how the economic-loss rule applies, if at all, to claims under N.C. Gen. Stat. § 75-1.1.  Two recent decisions by the North Carolina Court of Appeals—ten days apart—illustrate the varying approaches to this issue.

Applying the economic-loss rule to section 75-1.1 (sort of)

The economic-loss rule holds that when a claim involves economic losses in a contractual setting, a plaintiff cannot use extracontractual claims to recover those economic losses.

On December 30, 2016, in Buffa v. Cygnature Construction & Development, Inc., the Court of Appeals held that the economic-loss rule barred a section 75-1.1 claim.

In 2006, the Buffas built a home in Beech Mountain.  Five years after the construction ended, the Buffas discovered extensive water damage that had already harmed the structural integrity of the home.  Several inspections suggested that the water had entered through windows.           

The Buffas sued several companies associated with the construction, including the window manufacturer.  The Buffas’ 75-1.1 claim against the window manufacturer stated only the following (emphasis added): 

Windsor Windows engaged in unfair and deceptive acts or practices . . . when, in selling and advertising the windows in the Buffa Home, Windsor Windows failed to give the Buffas adequate warnings and notices regarding the defect in the windows despite the fact that Windsor knew or should have known of this defect, with the intent that the Buffas would rely upon Windsor’s failure to disclose the defect when purchasing the windows.  The Buffas were deceived by and relied upon Windsor Windows’ failure to disclose.

The trial court granted summary judgment in favor of the window manufacturer.  The court held that the economic-loss rule barred the 75-1.1 claim and several tort claims. 

The Buffas appealed.  On the section 75-1.1 claim, the Buffas argued that the economic-loss rule does not apply to 75-1.1 claims at all.  They cited a string of state and federal cases that, they argued, allowed consumers to recover under section 75-1.1 “for purely economic loss.”

Because the Buffas had not contracted directly with the window manufacturer, the Court of Appeals first considered whether the case was even within the general ambit of economic-loss rule.  The court held that it was within that ambit.  Although the Buffas did not contract directly with the window manufacturer, they were beneficiaries of a contract:  the window manufacturer’s express warranty.

After reaching that conclusion, the court rejected the Buffas’ “conten[tion that] the trial court erred by applying the economic-loss rule to a claim of unfair and deceptive trade practices.”  The court, however, did not analyze the economic-loss rule beyond that.  Instead, the bulk of the court’s opinion asked the more usual question in contract-based 75-1.1 cases: whether a breach of contract was accompanied by “egregious or aggravating circumstances.”

As the above block quote shows, the Buffas’ section 75-1.1 claim alleged only that the window manufacturer failed to notify the Buffas of a known design defect.  The Court of Appeals held that this nondisclosure was nothing more than a breach of warranty.  On that basis, it upheld the trial court’s summary judgment against the 75-1.1 claim.

Declining to apply the economic-loss rule to section 75-1.1 (sort of)

Just ten days earlier, a different panel of the Court of Appeals issued an opinion in the opposite direction—an opinion that might have a significant effect on the interplay among fraud claims, 75-1.1 claims, and the economic-loss doctrine.

In Bradley Woodcraft, Inc. v. Bodden, the Court of Appeals appeared to hold that fraud claims are never subject to the economic-loss rule—a holding that could affect section 75-1.1 claims as well.

In 2013, Christine Bodden and her husband bought a 20-year-old home in Raleigh.  They signed an agreement with a contractor to renovate the home.  The homeowners were dissatisfied with the renovation work and discussed their complaints with the contractor.  After the discussion, they believed that the contractor had promised to fix the problems, so Ms. Bodden used her credit card to pay the final $26,000 due.  The contractor, in contrast, did not believe that he had agreed to do any further work.  When the contractor did no further work, Ms. Bodden disputed the $26,000 charge on her credit card.

The contractor then sued for breach of contract.  Ms. Bodden counterclaimed for breach of contract, fraud, and violations of section 75-1.1.  The case went to trial.  At the close of Ms. Bodden’s evidence, the contractor moved for a directed verdict on the fraud and section 75-1.1 counterclaims, citing the economic-loss rule.  The trial court granted the contractor’s motion.

On appeal, the Court of Appeals focused on the fraud claim. The court seemed to hold categorically that the economic-loss rule does not apply to fraud claims:  “[W]hile claims for negligence are barred by the economic-loss rule where a valid contract exists between the litigants, claims for fraud are not so barred.” 

The court went on to reverse the directed verdict against Ms. Bodden’s 75-1.1 claim because that claim was “factually interwoven” with the fraud claim.  This ruling arguably extended the court’s economic-loss reasoning to section 75-1.1.

If the holding in Bradley is as broad as it appears, it could muddy the relationship among fraud, section 75-1.1, and the economic-loss doctrine.  Under a broad reading of Bradley, breaches of promises in an oral contract would—despite the economic-loss doctrine—support a fraud claim.  And fraud, it bears remembering, is a per se violation of section 75-1.1. 

These points, if confirmed, could lead to a proliferation of fraud claims in business disputes.  Under Bradley, adding fraud claims might help plaintiffs avoid the usual fate of contract-based 75-1.1 claims—summary rejection.

On the other hand, Bradley is probably narrower than it appears.  The record and briefs in the case show that the fraud and 75-1.1 claims were based on extracontractual statements by the contractor, including statements about the contractor’s qualifications and later representations about potential damage to the home.  Given this context, the court’s decision might well reflect the “independent duty” exception to the economic-loss rule.  That exception holds that even when a contract generally applies, a plaintiff can pursue tort claims that arise from a defendant’s extracontractual duties.

* * *

 As Buffa and Bradley confirm, the relationship between the economic-loss doctrine and section 75-1.1 will remain unclear until the North Carolina Supreme Court considers the issue.  Bradley might give the court such an opportunity, but the small stakes of the case might prevent the opportunity from arising.

Author: Jeremy Falcone