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

Can a Third Party Sue an Insurer for Unfair Trade Practices?

Can a third party use N.C. Gen. Stat. § 75-1.1 to sue an insurer based on an insured’s misdeeds? A recent decision by the North Carolina Business Court answers with a qualified “no.”

North Carolina law has usually barred third parties from suing insurers. Courts have recognized exceptions, however, when a third party is an intended beneficiary of an insurance policy. USA Trouser, S.A. de C.V. v. Williams imports that idea into the law under section 75-1.1.

Was USA Trouser Faked Out of Its Socks?

USA Trouser (belying each part of its name) manufactured socks in Mexico. A distributor in North Carolina, International Legwear Group, ordered socks from USA Trouser. Shortly after placing its final order for socks, International sold all of its assets to another company. In the wake of the asset sale, International could not pay USA Trouser.

In federal court, USA Trouser sued International and three of its officers and directors for fraud, breach of fiduciary duty, and violations of section 75-1.1. It alleged that International committed all these violations by ordering socks without telling USA Trouser about International’s inability to pay.

International had an insurance policy that covered director and officer (D&O) liability. At the beginning of the federal lawsuit, the D&O carrier defended International and the individual defendants alike. Soon, though, the law firm appointed by the D&O carrier withdrew from representing International.

In the end, the federal court entered a default judgment against International for about two million dollars. USA Trouser demanded that International’s D&O insurer pay this judgment, but the insurer refused.

USA Trouser Sues the D&O Insurer Directly

USA Trouser then sued the insurer, the insurer’s parent company, and one of International’s officers in North Carolina state court. USA Trouser accused the insurer of conspiring with others to cause International to default in the federal lawsuit, then refusing to pay the default judgment.

USA Trouser’s theories against the insurer included an assertion of bad-faith claims handling in violation of N.C. Gen. Stat. § 58-63-15(11). USA Trouser also asserted a 75-1.1 claim against the insurer.

The case found its way to the North Carolina Business Court. In the Business Court, the insurer moved to dismiss all of USA Trouser’s claims against it, including the bad-faith claim and the 75-1.1 claim. Chief Judge Gale granted that motion to dismiss.

The court first dismissed the count under the claims-handling statute, because that statute does not include a private right of action. In contrast, the court shone a ray of hope on USA Trouser’s 75-1.1 claim: it noted that a violation of the claims-handling statute is a per se violation of section 75-1.1.

That ray of hope, however, soon faded. In the end, the court held that North Carolina law categorically barred the liability that USA Trouser was seeking. The court reached this conclusion after analyzing two lines of decisions from the North Carolina Court of Appeals.

In Wilson v. Wilson, the Court of Appeals held that a third party could not pursue a 75-1.1 claim against the insurer of an adverse party. The court reasoned that the third party was a stranger to the insurance contact and also lacked privity with the insured itself. The Wilson court expressed the concern that allowing third parties to sue insurers would encourage frivolous settlement demands against insured parties. The court also worried that third-party claims would cause a conflict with an insurance company’s duty to act in good faith on behalf of its insured.

The same year that the Court of Appeals decided Wilson, however, another panel of the Court of Appeals allowed a third party to pursue a 75-1.1 claim against an insurer. The plaintiff in that case, Murray, was injured in a car accident with a person who had a Nationwide Mutual liability policy. The Court of Appeals distinguished Wilson on the theory that the injured party in Murray was an intended third-party beneficiary of the Nationwide insurance contract. To support that theory, the Murray court reasoned that protecting victims of auto accidents is one reason why North Carolina requires drivers to carry auto liability insurance.

To decide USA Trouser, the Business Court had to choose between the Wilson and Murray lines of cases. To make that choice, the court asked whether USA Trouser was an intended third-party beneficiary of International’s D&O insurance policy.

The court held that USA Trouser was not such a beneficiary. Unlike the accident victim in Murray, USA Trouser was not a party whom other law—such as the statute that requires minimum levels of auto liability insurance—marks as an intended beneficiary of liability insurance. In addition, the D&O policy at issue in USA Trouser did not expressly allow third parties to sue under it. In the end, the court saw no “policy justification that would require a court to [hold] that a company’s general liability or D&O liability insurance coverage inures to the direct benefit of injured trade creditors like USA Trouser.”

When future third parties file 75-1.1 claims against insurers, courts are likely to analyze the same factors that the court addressed in USA Trouser. Unless another body of law or an insurance contract itself seeks to protect a third party, that party’s 75-1.1 claim will fail as a matter of law.

Author: George Sanderson

Bankruptcy Court Rejects Unfair-Practices Claim Against Insurer Accused of Aiding and Abetting Conversion of Trust Funds

A recent decision reminds us that North Carolina’s bankruptcy courts often rule on claims under N.C. Gen. Stat. § 75-1.1.

In re NC & VA Warranty Co. was an adversary proceeding in the bankruptcy of a warranty company. The company’s bankruptcy trustee tried to amend her complaint to assert breach-of-contract and 75-1.1 claims against the company’s insurer. The bankruptcy court, however, held that the proposed 75-1.1 claim was futile. The court reasoned that the claim didn’t allege egregious or aggravating circumstances in connection with the insurer’s alleged breach of contract.

A Trust Account Gone Bad

NCVA was a North Carolina-based company that sold extended car warranties to consumers. It contracted with an Ohio-based insurer to back up its obligations to pay claims. NCVA paid the insurer a monthly premium based on the number of extended warranties that NCVA sold. It deposited the premiums into a trust account.

NCVA and the insurer had a contract that governed the trust account. The contract barred the insurer from withdrawing funds from the account except to pay warranty claims or to reimburse itself for paying claims.

Despite this contract term, the insurer allegedly allowed the son of NCVA’s owner to divert $4 million from the trust account to an account that the son controlled. This alleged diversion of funds led to NCVA’s bankruptcy filing.

On behalf of NCVA’s bankruptcy estate, the trustee filed an adversary proceeding: a bankruptcy-court lawsuit that is meant to recover assets from third parties for the sake of the bankruptcy estate.

During that adversary proceeding, the trustee sought permission to amend her complaint to add claims—including a 75-1.1 claim—against NCVA’s insurer. The trustee alleged that the insurer knew that the funds had been diverted from the trust account, but took no steps to recover the funds or to alert NCVA that the funds had been transferred.

The bankruptcy court allowed the trustee to add breach-of-contract claims against the insurer. The court, however, rejected the trustee’s proposed extracontractual claims, including her 75-1.1 claim, as futile.

Nothing More Than a Breach-of-Contract Claim

First, the court rejected the trustee’s proposed claim for breach of fiduciary duty. The court held that the insurer’s status as a beneficiary under the trust agreement did not, by itself, give the insurer any fiduciary obligations. Likewise, the insurer’s alleged breaches of the trust agreement did not turn a contractual relationship into a fiduciary relationship. The court also noted that the insurance agreement imposed fiduciary obligations on NCVA, but not on the insurer.

The court also rejected the trustee’s fraud claim against the insurer. The court treated the fraud claim as one based on nondisclosure: the insurer’s failure to disclose that it had breached the insurance contract. This claim failed because, under Ohio law, the insurer had no specific duty to disclose the withdrawal of funds from the trust account.

The trustee’s 75-1.1 claim fared no better.

At the start, the court asked whether the 75-1.1 claim was viable under a per se theory. The court stated that a breach of fiduciary duty “is sufficient to support” a 75-1.1 claim and that fraud “necessarily” establishes a 75-1.1 claim. In this case, though, both of those predicate claims had already failed. Thus, a per se theory under section 75-1.1 had no way to proceed.

The court then asked whether the claim could survive on a non-per-se basis. It could not. In the court’s view, the claim alleged no more than an intentional breach of conduct—one lacking any “egregious or aggravating circumstances.”

The court analogized the case to Broussard v. Meineke Discount Muffler Shops, Inc., a key Fourth Circuit decision that condemns treating intentional breaches of contract as sources of treble damages under section 75-1.1. Broussard, like NCVA, involved allegations that a party withdrew trust-account funds in breach of a contractual limit on the use of those funds. The Broussard court rejected that claim with ringing language:

It has been said that because “[p]roof of unfair or deceptive trade practices entitles a plaintiff to treble damages,” a [75-1.1] count “constitutes a boilerplate claim in most every complaint based on a commercial or consumer transaction in North Carolina.” To correct this tendency, and to keep control of the extraordinary damages authorized by [section 75-1.1], North Carolina courts have repeatedly held that a “mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under [section 75-1.1].” Even though “[i]n a sense, unfairness inheres in every breach of contract when one of the contracting parties is denied the advantage for which he contracted,” North Carolina law requires a showing of “substantial aggravating circumstances” to support a claim under [section 75-1.1]. Given the contractual center of this dispute, plaintiffs’ [75-1.1] claims are out of place.

(Citations omitted.)  The NCVA court quoted and followed this reasoning when it held that the trustee’s proposed 75-1.1 claim was futile.

NCVA shows that even intentional misconduct, if it is bound up with a contract, often cannot support a 75-1.1 claim. This is especially true where a contract defines the parties’ obligations to each other. In those cases, the search for “substantial aggravating circumstances” will decide whether a 75-1.1 claim stands or falls.

Author: George Sanderson