Author Archives: Jeremy Falcone

An Important New Decision on Substantial Aggravating Circumstances

North Carolina courts regularly dismiss claims for violation of N.C. Gen. Stat. § 75-1.1 where the allegations amount to nothing more than a breach of contract. 

A recent decision by Judge Adam M. Conrad of the North Carolina Business Court, however, provides a potential pathway around that doctrine. In LendingTree v. Intercontinental, Judge Conrad denied a motion to dismiss a section 75-1.1 claim even though the parties’ contract created the duties that gave rise to the action.

This post examines how Judge Conrad reached that result.

Intercontinental Hires LendingTree’s Key Employees

LendingTree describes itself as an online loan marketplace. It allows mortgage seekers to have potential lenders compete to provide a loan.

Intercontinental is a lender that has a contract with LendingTree. Intercontinental does business across the country under the trade name eQualify.

Intercontinental’s contract with LendingTree forbids Intercontinental from hiring LendingTree employees. LendingTree had no contract with eQualify.

LendingTree alleged that Intercontinental breached the contract by recruiting and hiring LendingTree’s employees. Daniel Wilson, former Chief Architect of Technology at LendingTree, and Laura Ashley Brooks, LendingTree’s Senior Director of Product Management, were among the targeted employees. Both Mr. Wilson and Ms. Brooks joined Intercontinental, and LendingTree alleged that these employees were tasked with building a system to compete directly with LendingTree.

After learning about the departures, LendingTree accused Intercontinental of a contract breach. Ron Fountain, Intercontinental’s President and General Counsel, responded and denied a breach. Mr. Fountain specifically noted that the employees were employed by eQualify, not Intercontinental.

LendingTree then sued Intercontinental, eQualify, and the two former employees. The complaint included both contract and tort theories. Against Intercontinental, LendingTree also included a section 75-1.1 claim. 

Intercontinental moved to dismiss the section 75-1.1 claim on two grounds. 

First, Intercontinental argued the tried-and-true defense that a mere breach of contract cannot give rise to a section 75-1.1 claim. 

In its second—and more novel argument—Intercontinental attempted to take advantage of the learned-profession exemption to section 75-1.1 liability. 

Judge Conrad rejected both of these arguments.

You Can Breach, But You Better Not Enjoy It

Intercontinental argued that LendingTree’s claim was nothing more than a breach of contract: its contract with LendingTree, Intercontinental contended, spelled out the obligations that gave rise to the conduct at issue.

Judge Conrad, however, identified potential aggravating circumstances that could elevate a breach of contract to a section 75-1.1 claim. He focused in particular on two actions by Intercontinental:

  1. Intercontinental’s attempt to circumvent the non-solicitation provision by having its alter ego, eQualify, hire the employees—even though the employees were providing services to Intercontinental; and
  1. Intercontinental’s denial that it had breached the agreement. That denial, Judge Conrad explained, was “akin to concealment of a breach.”

These actions by Intercontinental, Judge Conrad explained, reflected deception in connection with the breach. As we have noted before, the “substantial aggravating circumstances” doctrine evolved from decisions that involved deceptive conduct. Judge Conrad’s ruling confirms the vitality of this doctrine.

Notably, in reaching this ruling, Judge Conrad noted that the amended complaint alleged that Intercontinental enjoyed “both the benefit of its bargain and the benefit of its breach.” This statement, if read in isolation, might imply that an intentional breach of contract is a 75-1.1 violation. Judge Conrad, however, explained that—in this case—Intercontinental had stated a cognizable 75-1.1 claim because of its deceptive conduct. He then cited to two decisions—Sparrow Systems v. Private Diagnostic Clinic, and Interstate Narrow Fabrics v. Century USA—to emphasize the point. In both Sparrow Systems and Interstate Narrow Fabrics, a 75-1.1 claim survived a dispositive motion because of deceptive conduct related to a contract.

It’s Not Always the Lawyer’s Fault

Intercontinental also tried to blaze a new legal path with its second argument to avoid liability.

In raising a section 75-1.1 claim, LendingTree had focused on Intercontinental’s deceit in hiding its breach of contract through the letter that professed that the employees were actually eQualify’s employees. Because its lawyer wrote that letter, Intercontinental argued that the learned-profession exemption to section 75-1.1 liability barred the claim.

Judge Conrad made quick work of this theory: he pointed out that LendingTree’s claim concerned Intercontinental’s actions in hiring LendingTree’s employees. Thus, the 75-1.1 claim did not rest solely on the actions of an attorney.

In addition, Intercontinental’s attorney sent the letter to LendingTree in his capacity as the company’s general counsel and president. The acts of a company officer do not enjoy the protection of the learned-profession exemption. 

Pleading Around a Mere Breach of Contract

Judge Conrad’s decision shows that a plaintiff may be able to construct a contract-based section 75-1.1 claim by focusing on the defendant’s deceptive conduct after the breach.  If the defendant took steps to avoid the plaintiff discovering the breach, those steps may constitute sufficient substantial aggravating circumstances to allow a section 75-1.1 claim.

Author: Jeremy Falcone

Further Closing the Narrow Opening for Section 75-1.1 in the Employer-Employee Context

A recent opinion from the North Carolina Business Court illustrates courts’ continued reluctance to allow section 75-1.1 claims in the context of an employer-employee relationship. Judge James L. Gale recently dismissed a N.C. Gen. Stat. § 75-1.1 claim that arose from an employment relationship that had evolved into a business partner and buyer-seller relationship.

In Urquhart v. Trenkelbach, Judge Gale accepted the defendants’ contention that their actions all involved the internal operations of the company, and thus were not “in or affecting commerce.” 

Just When I Thought I Was Out, They Pulled Me Back In

In 2007, Curtis L. Trenkelbach recruited Christopher J. Urquhart to work for Trenkelbach’s commercial construction company.

Trenkelbach was the sole owner of the company.  He apparently wanted an exit strategy, and he saw a potential successor in Urquhart.  The two orally agreed to a succession plan through Urquhart’s gradual purchase of Trenkelbach’s shares.

To facilitate the succession, Trenkelbach and Urquhart formed a new LLC.  The members of the LLC included Trenkelbach, Urquhart, and a separate corporation formed to allow Urquhart to increase his ownership interest in the company.

As part of the formation of the LLC, Trenkelbach and Urquhart executed several agreements.  The operating agreement required cause before a manager could be removed.  Likewise, Urquhart’s employment agreement restricted termination to situations where there was cause.

Initially, things went well. 

The business flourished, and Trenkelbach’s faith in Urquhart proved warranted.  Over five years, the company’s revenues quadrupled.  The tremendous success also accelerated Urquhart’s succession to ownership, which was tied to company performance.

The success may have also caused Trenkelbach to reconsider his departure. 

Urquhart alleged that Trenkelbach orchestrated a scheme to force Urquhart’s ouster by manufacturing cause for termination, removing him as a manager, terminating his employment, and exercising a provision that allowed Trenkelbach to repurchase Urquhart’s ownership interest in the company.

The Alexander v. Alexander Exceptions Remain Narrow

Urquhart brought a dozen claims against Trenkelbach, including the section 75-1.1 claim.

He premised the section 75-1.1 claim on allegations that Trenkelbach forced him out of management, attempted to manipulate the succession agreement, terminated Urquhart’s employment, and wrongfully diverted company funds.

Trenkelbach moved to dismiss.  He argued that the conduct took place solely within the confines of the company, so the conduct was not “in or affecting commerce.”

Judge Gale first reviewed the landscape of section 75-1.1 cases involving employer and employee. 

He relied on the reasoning of the Court of Appeals in its 2016 decision in Alexander v. Alexander.  In that case, the Court of Appeals determined that a section 75-1.1 claim could lie—even in an employer-employee context—if the claims involved outside businesses, distinct corporate entities, or the interruption of a commercial relationship between two market participants.

From these facts, Urquhart’s claim might appear to fit within one of these exceptions, given that the dispute involved two separate corporate entities (albeit entities formed for a related purpose).  Urquhart had his own, separate company created to purchase shares of the primary company.

However, Judge Gale did not find that Trenkelbach’s conduct met any of the Alexander exceptions.  Instead the facts more closely resembled cases that declined to allow a section 75-1.1 claim:

  • Urquhart’s termination involved conduct internal to the company.
  • Any diversion of company funds was an internal issue and not affecting commerce.
  • Finally, any actions relating to the succession plan related only to an internal agreement between managing members of the company. Therefore, any violation of that agreement also occurred internally, within the confines of a company.

Having determined that no conduct occurred outside the internal dealings of the company, Judge Gale dismissed the claim. 

As an alternative ground for dismissal, Trenkelbach had argued that the conduct underlying the section 75-1.1 claim arose out of the breach of a contract.  Having determined that the conduct was not in or affecting commerce, Judge Gale did not reach this issue.

The Uphill Battle for Any Section 75-1.1 Claim Involving an Employer-Employee Relationship

Even with good ammunition—including the sale of a company and separate corporate entities—Urquhart could not plead a section 75-1.1 claim. 

Would-be section 75-1.1 plaintiffs in the employment context need a hook outside the internal company dynamics to try and wedge the claim into the narrow exceptions spelled out in Alexander.  In Trenkelbach, one potential possibility might be the activities of the other companies—did any have some external purpose, not solely tied to the purchase of ownership in Trenkelbach’s company?  Any external purpose might have given the plaintiff that extra hook.

Absent that type of pleading, these types of claims will continue to be dismissed.

Author: Jeremy Falcone

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