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

Presentation on Litigating Section 75-1.1 Claims in the North Carolina Business Court

Last Friday, the Mecklenburg County Bar presented its Fourth Annual North Carolina Business Court CLE. The program featured a panel discussion by the North Carolina Business Court judges, as well as programs on the proposed revisions to the Business Court Rules, a review of recent Business Court decisions, and advice from mediators on best practices for resolving Business Court disputes.

In addition to these talks, Matt Sawchak presented at the Business Court CLE on litigating claims under section 75-1.1 in the Business Court.

The presentation covered several issues that we’ve analyzed in this blog, including:

The PowerPoint slides for the presentation can be downloaded here. As always, we welcome your feedback on these slides and on what topics would be beneficial to cover in future presentations.

Contracts and Unfair Trade Practices, Redux

A recent decision by the North Carolina Business Court underscores the challenges faced by a party who tries to convert a breach of contract into a violation of N.C. Gen. Stat. § 75-1.1.

A breach of contract alone, even if intentional, does not violate section 75-1.1. The plaintiff must show substantial aggravating circumstances attendant to the breach. That showing usually requires a showing of deceptive conduct.

What, though, if substantial aggravating circumstances are hard to plead? The plaintiff might try to recharacterize his 75-1.1 claim to make it seem less like a breach of contract.

That recharacterization, however, would expose the plaintiff to a different attack: Facts that suggest a breach of contract usually do not give rise to a tort claim. This doctrine, often called the economic-loss rule, might sound the death knell for a recharacterized 75-1.1 claim that is styled like a tort claim.

These principles take center stage in Judge Gregory P. McGuire’s decision in Broadnax v. Associated Cab & Transportation Inc.

The Wheels on the Bus Came to a Grinding Halt

The Broadnax plaintiffs drove school buses for Wake County students. The plaintiffs did not have contracts directly with the Wake County Public School System. Instead, they contracted with a company called Associated Cab. Associated Cab, in turn, agreed to transport Wake County students to and from school.

The plaintiffs sued Associated Cab because, in essence, it didn’t pay the plaintiffs the compensation due under their contracts. In particular, the plaintiffs accused the company of making unauthorized deductions from the plaintiffs’ pay. The deductions took several forms, including “office fees.”

The plaintiffs also accused Associated Cab of lying to them about the deductions. According to the complaint, Associated Cab told the plaintiffs that the company wouldn’t make unauthorized deductions—but the company helped itself to those deductions anyway. The complaint alleges that the plaintiffs relied on these misrepresentations.

The plaintiffs raised eight claims, including a 75-1.1 claim and a fraud claim, based on this fact pattern.

Associated Cab filed a motion to dismiss. The company raised two arguments specific to the plaintiffs’ 75-1.1 claim.

First, the company argued that the plaintiffs cannot sue for fraud because their dispute is based on the terms of their contracts.

Second, the company argued that the 75-1.1 claim is no more than a claim for an intentional breach of contract.

A Contract Dispute

Judge McGuire agreed with Associated Cab and dismissed the section 75-1.1 claim. His opinion offers guidance to future litigants as they consider the intersection of contract claims, tort claims, and 75-1.1 claims.

First, Judge McGuire clarified that, to state a fraud claim against a contracting party, a plaintiff must allege conduct “distinct from the primary breach of contract claim.”

This principle sealed the fate of the Broadnax plaintiffs’ fraud claim. The fraud claim, after all, relied on the same facts as the contract claim: the company’s failure to pay the plaintiffs their full compensation.

Judge McGuire then pivoted to the 75-1.1 claim. His opinion explained that, like a fraud claim, a 75-1.1 claim must be distinct from a claim for breach of contract. In Broadnax, the complaint failed to distinguish the 75-1.1 claim from the plaintiffs’ contract claim. Indeed, it did the opposite. It alleged that the company’s duties regarding the plaintiffs’ compensation were “made in, or in conjunction with, the subcontracts.”

Second, Judge McGuire reiterated that a 75-1.1 claim premised on a contract breach must show substantial aggravating circumstances attending the breach.

His opinion then turned to the specific allegations in Broadnax. The plaintiffs alleged only that the company entered into contracts that the company never intended to fulfill, or that the company intentionally breached those contracts. These claims, Judge McGuire explained, fell squarely within the plaintiffs’ breach-of-contract claim. They mirrored the types of 75-1.1 claims that courts have dismissed for failure to allege substantial aggravating circumstances.

Distinguishing Contract Claims and 75-1.1 Claims

The Broadnax decision shows why an alleged section 75-1.1 violation is unlikely to succeed as a mere tag-along claim when a complaint also alleges (in substance) a contract breach.

If the basis for the 75-1.1 violation is not distinct from the contract breach, the 75-1.1 claim must clear the bar for pleading substantial aggravating circumstances. As Broadnax shows, alleging deception as part of the breach might not be enough.

A plaintiff might try to avoid this problem by creating the perception that the 75-1.1 claim is distinct from the breach, and is instead more like a tort. Broadnax, however, makes clear that such a 75-1.1 claim must derive from a duty independent of the relevant contract.

Overall, these points show that, when a contract is involved, a party who wants to assert a 75-1.1 violation must carefully select a viable theory.