Author Archives: Jeremy Falcone

Does Misappropriation of Trade Secrets by a Former Employee Constitute a Per Se Violation of Section 75-1.1?

As we have explored, a party that tries to prove a violation of N.C. Gen. Stat § 75-1.1 in connection with an employment matter faces some serious obstacles.

A recent decision from the U.S. District Court for the Western District of North Carolina analyzes one of these obstacles. In Legacy Data Access, LLC v. Mediquant, Inc., Chief Judge Frank D. Whitney examined an important issue in 75-1.1 jurisprudence that arises regularly in departing-employee matters: does the misappropriation of trade secrets constitute a per se violation of section 75-1.1?

This post studies Judge Whitney’s analysis. (His opinion also assesses another important issue on the law of section 75-1.1: the application of the statute to the conduct of a departing employee and his new employer. We will explore this aspect of the opinion in a later post.)

An Employee Joins a Competitor—at a Price of $600,000

William Rowland worked for Legacy Data Access until he resigned to join Mediquant. Legacy believed that Rowland took trade secrets and clients with him.

Legacy then sued Mediquant. The lawsuit included a claim for trade-secret misappropriation under the North Carolina Trade Secrets Protection Act, as well as an alleged violation of section 75-1.1.

After a six-day trial, Legacy largely prevailed. The jury awarded Legacy $600,000 on the trade-secret claim. Legacy also prevailed on the 75-1.1 claim, but it received only nominal damages of $1.

Legacy and Mediquant filed post-trial motions—including motions to amend the judgment on the 75-1.1 claim:

  • Legacy argued that a misappropriation of trade secrets is a per se violation of section 75-1.1. That conclusion would call for the $600,000 award to be trebled.
  • Mediquant argued that Legacy had not proven a violation of section 75-1.1. In particular, Mediquant argued that that the jury’s finding that Mediquant had employed Rowland—when Mediquant knew that Rowland was violating his restrictive covenants with Legacy—did not give rise to 75-1.1 liability. We will explore this aspect of the case in a later post.

Judge Whitney considered both motions, but ultimately left the verdict untouched.

Are Per Se Violations the Exception?

The North Carolina Supreme Court has not addressed whether a violation of the Trade Secrets Act is a per se violation of section 75.1.1. In view of this void, Judge Whitney turned to other Supreme Court decisions that assessed arguments for 75-1.1 per se liability based on the violation of some statute:

  • In Winston Realty Co. v. G.H.G., Inc., the Court treated the violation of a statute designed to regulate the actions of employment agencies as a per se violation of section 75-1.1.
  • Similarly, in Pearce v. American Defender Life Insurance Co., the Court concluded that violations of a statute designed to define unfair or deceptive trade practices in the insurance industry also amounted to violations of section 75-1.1.
  • Judge Whitney also noted the Court’s recent refusal in Walker v. Fleetwood Homes of North Carolina to treat the violation of a licensing regulation under the North Carolina Administrative Code as a per se violation of section 75-1.1.

Having reviewed these cases, Judge Whitney concluded that a violation of the Trade Secrets Act does not establish a per se unfair or deceptive trade practice. He noted that the Trade Secrets Act has several features that the relevant statutes in Winston and Pearce did not have. 

First, the Trade Secrets Act contains a private right of action. The Trade Secrets Act also allows violations even where the violator has acted by mistake or in good faith. Judge Whitney further noted that the Trade Secrets Act protects property rights, while the statutes in Winston and Pearce were designed to protect consumers.

Perhaps most importantly, Judge Whitney understood Walker to reflect that the law on section 75-1.1 disfavors per se violations. Judge Whitney viewed the Walker Court’s refusal to find a per se violation as an indication that the Supreme Court “is not inclined to recognize violations of regulations or statutes as ‘unfair or deceptive trade practices’ as a matter of law.”

Finally, Judge Whitney examined decisions of the North Carolina Court of Appeals regarding the relationship between a misappropriation of trade secrets and 75-1.1 liability. In Medical Staffing Network v. Ridgway, the Court of Appeals stated that a “violation of the Trade Secrets Protection Act constitutes an unfair act or practice.” In its decision in Drouillard v. Keister Williams Newspaper Services, Inc., however, the Court of Appeals concluded that a violation of the Trade Secrets Act does not automatically violate section 75-1.1. These cases, Judge Whitney explained, suggest there is no per se rule that a violation of the Trade Secrets Act also violates section 75-1.1.

Having determined that a violation of the Trade Secrets Act does not automatically violate section 75-1.1, Judge Whitney considered whether any of the jury’s other findings nevertheless demonstrated that the misappropriation here was an unfair and deceptive trade practice. The only other finding available to Judge Whitney was the jury’s damages number of $600,000. Judge Whitney concluded that the damages alone did not suggest that the conduct fit within the intended reach of section 75-1.1.  Thus, the misappropriation of trade secrets did not establish an unfair or deceptive trade practice. 

The Evolution of Per Se Theories

For a litigant who seeks to impose 75-1.1 liability under a per se theory, the decision in Legacy Data reveals the types of arguments that the litigant will likely face. These arguments may rely on (1) appellate decisions on per se liability, (2) the relevant statutory language, and (3) the purpose of the statute that serves as the predicate violation.

Legacy Data also serves as a reminder of the varying law on per se liability. Matt Sawchak—this blog’s founder, and the current North Carolina Solicitor General—recently prepared an in-depth analysis of this area of 75-1.1 law in the North Carolina Law Review.

This article, and Legacy Data, are important reads for North Carolina business litigators.

Author: Jeremy Falcone

Internal Business Disputes, Third Parties, and Section 75-1.1

The reach of N.C. Gen. Stat § 75-1.1 extends to conduct “in or affecting commerce.” Although this phrasing seems broad, courts interpreted it to exempt several types of conduct from the statute’s purview. 

One recognized exemption is for internal business disputes: that is, conduct among members of the same business.

A recent decision by the North Carolina Business Court addressed this important exemption. In Chisum v. Campagna, the plaintiff tried to sidestep the exemption by alleging that his section 75-1.1 claim involved not only owners of the same business, but also several third-party companies.

Did that allegation bring the claim within the statute’s ambit? This post examines the Court’s analysis and conclusion.

A membership dispute

Dennis Chisum was a commercial real estate developer in the Wilmington area. In the 1990s, he teamed up with fellow Wilmington developers, and father and son, Rocky and Rick Campagna. The three formed several LLCs to develop land in and around Wilmington.

Chisum alleged that, beginning in 2007, the Campagnas started a campaign to squeeze Chisum out of the LLCs. The campaign allegedly included “sham” capital calls, designed to dilute his interest in each company. According to Chisum, he never received notice of the capital calls, and the Campagnas also held member meetings without him. Through these capital calls and meetings, the Campagnas purported to cut Chisum’s ownership in each company in half.

Chisum further alleged that the Campagnas engaged in self-interested transactions, including (a) diverting opportunities to themselves or other entities they controlled, (b) selling the companies’ assets without Chisum’s knowledge or approval, and (c) failing to pay Chisum his proper share of the assets. 

Chisum’s complaint included a section 75-1.1 claim. The defendants moved to dismiss that claim.

Conduct does not become less “internal” to a business simply because the conduct benefits third parties

Judge Gregory P. McGuire granted the motion to dismiss. As his decision explains, Chisum’s section 75-1.1 claim concerned a dispute between owners of a business—and therefore fell beyond the statute’s reach.

Judge McGuire noted that the Campagnas’ allegedly wrongful conduct involved intracorporate actions. This conduct included the “sham” capital calls, a fraudulent attempt to amend an operating agreement, and the Campagnas’ conversion of Chisum’s membership interests. 

That alleged conduct, Judge McGuire explained, did not affect any other market participants; the conduct only affected the co-owners of the businesses. To confirm this conclusion, Judge McGuire cited White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010). In White, the Supreme Court held that section 75-1.1 does not regulate the “internal conduct of individuals within a single market participant,” which the court defined as a “single business.”

While the exemption clearly captured these allegations, Chisum’s other allegations required a deeper analysis. Chisum alleged that the Campagnas had diverted assets and opportunities away from the Chisum-associated LLCs and into other companies that the Campagnas controlled. Chisum argued that the exemption did not apply to these actions because the actions involved third parties—namely, companies that the Campagnas alone controlled.

Here, Judge McGuire drew a line: he reasoned that the mere involvement of a third party was not enough, and that the allegedly unfair or deceptive conduct must actually be directed toward the third party to affect commerce. 

Judge McGuire then applied that rule. Chisum alleged that the Campagnas directed the unfair conduct toward the Chisum-associated LLCs—and not toward any third-party companies. The conduct therefore constituted conduct internal to the businesses that Chisum owned with the Campagnas. Critically, the fact that third-party companies benefitted from the allegedly wrongful conduct did not, by itself, mean that the Campagnas directed their conduct toward those companies.

Overcoming the exemption

The exemption for internal business disputes often sounds the death knell for section 75-1.1 claims. The decision in Chisum adds another data point to this conclusion. As Chisum reveals, the exemption can apply even when internal conduct benefits a third party.

Author: Jeremy Falcone

The Economic Loss Rule and Misrepresentation-Based Section 75-1.1 Claims

We’re not alone in our interest in how the economic-loss doctrine applies to alleged violations of N.C. Gen. Stat. § 75-1.1. 

In a recent case in the North Carolina Business Court involving section 75-1.1 claims, Judge Michael L. Robinson requested supplemental briefing on the economic-loss doctrine. 

Judge Robinson’s sua sponte order was followed by his application of the doctrine to the plaintiff’s claims on the defendants’ summary judgment motion. This post examines Judge Robinson’s decision and its result that dismissed several claims based on the doctrine but allowed others to proceed.

Best Laid Airplans

Carmayer, LLC v. Koury Aviation, Inc. involved the sale of a plane that did not go as planned.  If there were lemon laws for planes, this plane would be a candidate.

In October 2014, Amiel Rossabi (a lawyer) and Rocco Scarfone planned to purchase an aircraft to place into service as a charter jet through a federal program known as Part 135 that allows owners to generate profits from its use as a for-hire charter plane.  But the aircraft has to meet certain standards to qualify under Part 135.

Rossabi and Scarfone settled on a 1976 Cessna 421C twin-engine propeller aircraft.  They formed Carmayer LLC to buy the plane.

Early in their search, Rossabi and Scarfone were introduced to the defendants—a North Carolina company, its President, and its Director of Maintenance—as experts in the Part 135 process.  The defendants wore several hats in the Carmayer plan: 

  • Carmayer sought advice from the defendants on the purchase.
  • Carmayer sought advice on bringing the plane into compliance with the Part 135 program.
  • Carmayer later signed a lease with the defendants to facilitate the charter of the Cessna 421C under Part 135 as part of the defendants’ fleet.
  • Under the lease agreement, the defendants would also be responsible for monitoring the mechanical condition of the plane and advising Carmayer on the status of all scheduled maintenance, inspections, and overhaul of the plane.

But Carmayer’s plans quickly experienced turbulence.  The aircraft did not qualify under Part 135 and would require extensive maintenance to qualify.  Carmayer eventually took the plane from the defendants to get a second opinion, and learned there were 172 problems with the plane.  Today, Carmayer believes the plane may never qualify for the Part 135 program.

Carmayer then sued the defendants.  Carmayer’s complaint asserted claims for negligent misrepresentation, breach of fiduciary duty, and section 75-1.1 claims.  No contract claim was alleged.

In their answer, the defendants’ affirmative defenses included the economic-loss doctrine.  After discovery, however, they did not raise the doctrine in the briefing on their motion for summary judgment.

After a hearing on the motion, Judge Robinson issued his sua sponte order that requested additional briefing on the economic-loss issue. 

Apparently sensing which way the wind was blowing, Carmeyer asked Judge Robinson for leave to file an amended complaint to add a contract claim—after the briefing process on the economic loss doctrine had been completed but before Judge Robinson ruled.   Judge Robinson denied that request because Carmeyer had delayed in seeking leave to amend, and could have asserted the breach of contract as an alternative claim in its original pleading.

Splitting Airs

Judge Robinson began his analysis by separately evaluating each of the alleged negligent misrepresentations.  

First, Judge Robinson relied on the economic loss doctrine in dismissing claims that post-dated the parties’ lease agreement regarding the airworthiness of the plane and the potential to add it to the defendants’ fleet.  Judge Robinson found that these claims were all barred by the economic-loss doctrine.  The agreement governed the defendants’ duty to advise Carmeyer on the plane’s condition and certification status, and there was no evidence of a separate and distinct duty to maintain the plane or add it to the defendants’ fleet.

But Judge Robinson allowed two other negligent-misrepresentation claims to proceed.  Both claims involved representations made prior to the purchase of the plane and the parties signed the lease agreement. 

The first was premised on a representation that one of the defendants was an expert on chartering aircraft under Part 135. Judge Robinson cited Scarfone’s affidavit testimony that the defendants had represented that the President was an expert in the process.  Judge Robinson also cited the President’s testimony that he did not know how to get Part 135 approval. Judge Robinson dismissed other similar claims regarding the Director of Maintenance and the company itself, because those statements were made with reasonable care. 

The other claim was based on pre-agreement representations that the defendants knew what was required to make the plane Part 135-compliant. Judge Robinson cited a conflict of testimony regarding whether the plane needed to be maintained pursuant to the factory recommendations to be eligible for Part 135. The Director of Maintenance testified that such maintenance was not required, while the company that gave the second opinion on the plane testified that it was required. Judge Robinson found that there was a material issue of fact on this point, and denied summary judgment.

Judge Robinson also dismissed the fiduciary duty claims, finding there was no fiduciary duty between the parties.

Negligent Misrepresentation Equals Chapter 75

Judge Robinson then addressed the section 75-1.1 claims.  The complaint was thin on substance for these claims.  Carmeyer instead just tied the claim to the negligent misrepresentation and breach of fiduciary duty claims.

As a result, Judge Robinson did not deeply analyze the section 75-1.1 allegations.  Instead, he allowed the misrepresentation-based claims to proceed based on the two negligent misrepresentation claims that survived summary judgment.

Lessons for Litigants

The order in Carmeyer is an important read for North Carolina business litigators.

Carmeyer shows that, even after a defendant successfully shows that the economic-loss doctrine bars a claim for violation of section 75-1.1, the application of the doctrine might vary depending upon the timing and substance of the relevant conduct.

There’s another lesson in Judge Robinson’s denial of the motion to amend:  a party cannot avoid the economic-loss doctrine simply by not pleading a valid contract claim.  The Court’s denial of the motion to amend here could have been far more consequential if the Court had also dismissed the other tort claims.

Author: Jeremy Falcone