Author Archives: Stephen Feldman

Section 75-1.1 and Trial Evidence

When a claim for violation of N.C. Gen. Stat. § 75-1.1 goes to trial, what analytical framework governs the admissibility of evidence related to that claim?

Today’s post studies a recent decision by Judge Louis A. Bledsoe, III in the North Carolina Business Court that raises this question.

When an Asset Purchase Did Not Materialize, a Lawsuit Did

Insight Health Corporation v. Marquis Diagnostic Imaging of North Carolina concerns a lease agreement for an MRI scanner.

The plaintiff, Insight, provided one of the defendants, Marquis Diagnostic Imaging of North Carolina (MDI), with a scanner, support staff, and related services. In exchange, MDI paid Insight a monthly fee. Insight and MDI entered the agreement in 2012.

Roughly one year later, MDI closed its doors and sold its assets to another company. MDI stopped using the scanner—and stopped paying Insight.

MDI realized $1.15 million from its asset sale. None of that $1.15 million was paid to Insight. Insight then sued MDI for breach of contract and violation of section 75-1.1.

MDI and its co-defendants responded with affirmative defenses and counterclaims related to negotiations between Insight and MDI that predated the 2012 lease agreement. In those negotiations, Insight showed interest in buying MDI’s assets. Negotiations continued through the middle of 2013, but ultimately failed.

MDI characterized the failed negotiations and the 2012 lease agreement as related events. Judge Bledsoe, however, concluded otherwise, and dismissed or entered summary judgment on the defenses and counterclaims related to the failed negotiations.

The case is now headed to a trial set for November 6. In connection with the trial, Insight filed a pretrial motion to bar MDI from introducing evidence or argument about the negotiations that led up to the failed asset purchase.

The Key to Admissibility? The Plaintiff’s 75-1.1 Theory

When it asked Judge Bledsoe to bar evidence of the failed negotiations, Insight relied on Rules 401 and 402 of the Rules of Evidence. Those rules require evidence to be relevant in order to be admissible.

The motion put the ball in MDI’s court. Because the Court had dismissed MDI’s counterclaims and affirmative defenses based on the failed negotiations, what relevance might evidence of the negotiations have on Insight’s claims?

MDI told Judge Bledsoe that evidence of the failed negotiations will give the jury context about MDI’s breach of the MRI agreement.  More specifically, MDI seeks to convince the jury that MDI did not refuse to pay Insight in bad faith, but legitimately thought that it had a legal right not to do so.

MDI offered a second reason, as well: evidence of the negotiations will demonstrate to the jury MDI’s financial condition leading up to MDI’s breach of the MRI agreement.

To assess the admissibility of this evidence, Judge Bledsoe examined each of Insight’s claims—including, and especially, Insight’s claim for violation of section 75-1.1.

In particular, Judge Bledsoe tried to pinpoint the theory behind the 75-1.1 claim.

Judge Bledsoe first referred to the general rule that a defendant’s good faith is not a defense to an alleged violation of section 75-1.1.

Judge Bledsoe then noted that this rule has exceptions. Citing the North Carolina Supreme Court’s 2013 decision in Bumpers v Community Bank of Northern Virginia, Judge Bledsoe observed that section 75-1.1 claims “can be, and are, based upon a wide set of facts and circumstances.”

The spectrum of claims, Judge Bledsoe pointed out, includes theories that make a defendant’s motives relevant. He offered an example to prove the point:

  • Substantial aggravating circumstances can include forged documents, lies, and fraudulent inducement.
  • A defendant’s state of mind may be relevant to whether a defendant forged a document or made a misrepresentation.

In sum, a plaintiff can choose a 75-1.1 theory that involves facts about a defendant’s motives. When a plaintiff does so, Judge Bledsoe concluded, a defendant should be allowed to introduce evidence “that tends to show the absence of those same facts.”

Against this backdrop, Judge Bledsoe observed that the theory behind Insight’s section 75-1.1 claim “is not yet concrete.” He also observed that the aspects of the claim that have survived to trial relate to Insight’s breach-of-contract claim. If Insight argues a “substantial aggravating circumstances” theory to support the section 75-1.1 claim at trial—and tries to prove up that theory with evidence of MDI’s improper motive or intent—then MDI should be able to rebut that evidence with evidence of the failed negotiations and failed asset purchase.

Because Insight’s arguments and intentions remain unclear, Judge Bledsoe deferred ruling on admissibility. His opinion, however, forecasted how he will approach evidentiary questions on the 75-1.1 claim at trial.

On the Defendant’s Trial Evidence, Begin with the End in Mind

The Insight decision provides at least two important takeaways for North Carolina business litigators.

First, as always, the theory of a section 75-1.1 claim is central to the claim’s success. Courts consider the taxonomy of 75-1.1 claims—even when litigants do not.

Second, the relevant 75-1.1 theory provides a roadmap not only to the evidence that the plaintiff will need to support the theory, but also to the evidence that might be available to the defendant to disprove the claimant’s evidence.

This means that, if you represent a defendant, discerning a plaintiff’s 75-1.1 theory is a top priority. It also means that, if you represent a plaintiff, careful thinking is warranted to identify precisely what type of evidence you might be putting into issue based on your 75-1.1 theory.

Author: Stephen Feldman

How Variations in the Law on Deceptive Conduct Can Affect Litigation Strategy

North Carolina is not the only jurisdiction with a statute that prohibits deceptive conduct. These statutes, however, are not identical.

Today’s post shows how the variations among these statutes can affect litigation strategy.

The recent decision in Greene v. Gerber Products Co. provides the backdrop. Greene is a putative class action about advertisements and marketing for baby formula. The plaintiffs claim that Gerber falsely advertised that its formula reduces the risk that infants will develop allergies.

Greene features three sets of putative named plaintiffs. The plaintiffs bought the formula in three different states: Ohio, New York, and North Carolina. Each plaintiff alleged a violation of the statutory prohibition on deception in the state of purchase (for North Carolina, N.C. Gen. Stat. § 75-1.1). The plaintiffs sued Gerber in federal court in New York.

Gerber moved to dismiss. Its arguments for dismissing the statutory claims, however, varied significantly as to each set of plaintiffs.

Our inquiry: if the plaintiffs all alleged basically the same facts, and if each state prohibits deceptive advertisements, why do the arguments vary so much?

Good Start, but Bad Ending

Gerber sells a line of baby formula called “Good Start.” The plaintiffs took issue with statements on the label of this formula and with certain print and television advertising. Good Start contains partially hydrolyzed whey protein, an ingredient that Gerber claimed reduces the risk of developing allergies.

The plaintiffs alleged that these claims are false or deceptive. They then alleged that, when they decided to buy Good Start, they reviewed the representations about the formula’s alleged effects on allergies. They further alleged that Gerber used those statements to lure the plaintiffs—and all putative class members—to pay an inflated price.

Three Statutes, Three Sets of Arguments

Gerber moved to dismiss the statutory claims under Ohio, New York, and North Carolina law.

  1. Ohio

The Ohio plaintiffs alleged a violation of the Ohio Consumer Sales Practice Act. To pursue a class action under that act, a plaintiff must show that the defendant had notice that the alleged violation is substantially similar to an act or practice previously declared to be deceptive.

Gerber argued that it never had the required notice. In response, the plaintiffs argued that Gerber did have notice, based on (a) a rule promulgated by the Ohio attorney general, and (b) certain consent decrees between the attorney general and parties that allegedly made false health claims. The court agreed with Gerber, concluding—without getting into the weeds—that neither the rule nor the consent judgments count as prior determinations of deceptive conduct.

The court also dismissed the Ohio plaintiffs’ claims under the Ohio Deceptive Trade Practices Act. That act has mainly been interpreted as an analogue of the federal Lanham Act—and therefore does not confer standing on consumers.

Notably, Gerber’s arguments as to the Ohio plaintiffs have no application to a section 75-1.1 claim. Consumers can sue under section 75-1.1, and there’s no notice requirement for a class action.

  1. New York

The New York plaintiffs sued for violation of New York General Business Law § 349, which prohibits deceptive acts or practices against consumers. Gerber primarily argued that the New York plaintiffs couldn’t make out a violation of this statute because the plaintiffs didn’t suffer an actual injury, which section 349 requires.

The court disagreed. The complaint alleged that the New York plaintiffs would have purchased less-expensive formula but for the statements about allergies. That theory was sufficient, the court concluded, because it reflected a loss of money directly connected to an allegedly deceptive statement.

Would a “no injury” argument have fared better for an alleged violation of section 75-1.1? In 75-1.1 jurisprudence, courts have tended to refer to this issue as one of “standing.”  Courts have dismissed section 75-1.1 claims for failing to connect allegedly unfair or deceptive conduct to a real injury.

  1. North Carolina

Gerber, however, didn’t seek dismissal of the 75-1.1 claim in Greene based on an absence of injury. Instead, Gerber turned to a relatively recent line of cases that require a misrepresentation-based claim under section 75-1.1 to be pleaded with particularity.

The plaintiffs, citing earlier caselaw, argued against the particularity requirement.

The court then sidestepped the issue. It ruled that, even if the law requires particularity, the plaintiffs had satisfied that requirement. The court showed that the complaint:

  • specified and attached the alleged misrepresentations,
  • described where the misrepresentations were located,
  • explained why the statements were false or deceptive, and
  • included a statement of the plaintiffs’ reliance on the statements.

Interestingly, Gerber did not seek dismissal of the 75-1.1 claim based on the economic-loss rule. That tactical decision could be because of recent decisions about the interplay between that doctrine and section 75-1.1.

Know Your Geography

Gerber offers a vivid example of the havoc that a multistate consumer class action can wreak. Even when the case involves fundamentally a single fact pattern, state-by-state differences in the law on deceptive trade practices mean that a defendant that wants to file a Rule 12(b)(6) motion can raise a deluge of arguments.

That deluge, of course, can drown a reader. These cases therefore require careful strategic and tactical decisions in selecting the best arguments. Those decisions, in turn, call for a deep understanding of the law in each relevant state.

Plaintiffs, too, face hard decisions in (a) selecting which state’s law on deceptive conduct might be the best for a putative class action, and (b) crafting a complaint to anticipate the Rule 12(b)(6) arguments to come.

On top of these considerations, both plaintiffs and defendants in consumer class actions must assess the extraterritorial effect of statutory prohibitions on deceptive conduct, as well as questions of personal jurisdiction.

As these points show, there’s simply no magic bullet—for any party—in multistate claims about deceptive conduct. Even if a single theme might apply across all claims, the claims themselves might turn on different elements and defenses, and attention to these nuances can determine success or defeat.

Author: Stephen Feldman

The Plaintiff or Defendant Is Not from North Carolina. Does Section 75-1.1 Apply?

N.C. Gen. Stat. § 75-1.1 regulates conduct “in or affecting commerce.” The statute doesn’t expressly differentiate based on type of commerce—intrastate versus interstate.

When conduct involves parties both inside and outside North Carolina, however, the reach of section 75-1.1 can come into question. Only a few months ago, we reviewed a federal-court decision that described the different choice-of-law tests that courts have used when considering whether section 75-1.1 applies to multistate conduct.

The North Carolina Business Court recently issued another decision on the standards that govern whether a party from outside of North Carolina can raise a section 75-1.1 claim.

In Window World of Baton Rouge, LLC v. Window World, Inc., Judge Louis A. Bledsoe, III refused to dismiss a section 75-1.1 claim that the defendant argued was barred by choice-of-law principles. More specifically, the defendant argued that section 75-1.1 did not apply to the defendant’s conduct because no plaintiff had a home office in North Carolina.

How did Judge Bledsoe reach this conclusion? This post examines the decision.

A Window into a Franchise Dispute

The plaintiffs in Window World are franchisees of Window World, Inc. Window World is based in North Carolina.

The complaint accuses Window World—as franchisor—of committing a host of wrongs. Certain plaintiffs complained to Window World about these wrongs and appeared to reach a settlement with Window World, but Window World reneged.

This lawsuit followed. The complaint contains the usual assortment of contract claims, business torts, and an alleged violation of section 75-1.1.

The plaintiffs sued multiple defendants, including Tammy Whitworth, whose family once owned all outstanding shares of Window World’s stock, and against whom the plaintiffs seek to pierce the corporate veil.

Ms. Whitworth filed a motion to dismiss.  On the section 75-1.1 claim, Ms. Whitworth argued that the plaintiffs have not stated a cognizable claim because the plaintiffs have not alleged an in-state injury.

Mapping Out the Place of the Injury

Judge Bledsoe began his analysis of Ms. Whitworth’s argument by identifying the controlling choice-of-law rule.

Under decisions of the North Carolina Supreme Court, he explained, the law of the situs of the claim determines the applicable law for matters that affect the parties’ substantial rights. For tort claims, the situs of the claim is “the state where the injury occurred.”

How does a court determine where an injury occurs?

To answer that question, Judge Bledsoe drilled down on the specific choice-of-law rule that applies to alleged violations of section 75-1.1.

Just two months ago, in a decision called Soma Tech, Inc. v. Dalamagas, Judge Bledsoe concluded that the North Carolina Supreme Court would likely apply the lex loci rule to section 75-1.1 claims. The alternative rule would be the most-significant-relationship test, but, as Judge Bledsoe noted, the state Supreme Court has rejected the modern trend toward that test.

Under lex loci, the plaintiff is considered to have sustained his injury in the state where the last act occurred that gave rise to the injury.

This rule might sound straightforward, but the parties had competing arguments about how it applies:

  • Ms. Whitworth argued that because the plaintiffs are not located in North Carolina, they could not have been injured in North Carolina.
  • In response, the plaintiffs argued that they were injured in North Carolina. More specifically, they argued that the injury occurred when Window World—located in North Carolina—received kickbacks and other information that the law compelled them to disclose to the plaintiffs.

To evaluate these arguments, Judge Bledsoe turned to a 2010 decision of the North Carolina Court of Appeals called Harco National Insurance Company v. Grant Thornton LLP. In Harco, the Court of Appeals held that the location of a plaintiff’s business may be useful in determining whether a plaintiff suffered injury—but only if, “after a rigorous analysis, the place of injury is difficult or impossible to discern.”

In most cases, the Court of Appeals emphasized, “a plaintiff has clearly suffered its pecuniary loss in a particular state, irrespective of that plaintiff’s residence or principal place of business.” In those cases, lex loci applies, and the governing law is the law of the state where the plaintiff has actually suffered harm.

Judge Bledsoe then applied these teachings to the motion to dismiss.

In her motion, Ms. Whitworth made only a bare assertion that the plaintiffs “are not located in, and did not suffer injury in, North Carolina.” As Harco makes clear, the location of a plaintiff’s business does not exclusively determine where the plaintiff suffered injury. That determination depends on the facts of each case.

Here, the plaintiffs have alleged that they suffered an injury in North Carolina, based on Window World’s conduct and its acceptance of kickbacks. These allegations, viewed in the light most favorable to the plaintiffs, could not be interpreted to establish injury somewhere other than North Carolina, as Ms. Whitworth had argued.

Judge Bledsoe therefore denied the motion.

The Place of Injury and Section 75-1.1 Claims

Because section 75-1.1 claims are ubiquitous in North Carolina business litigation, one can easily overlook the question of whether section 75-1.1 applies when the plaintiff or defendant is not from North Carolina. This is an important question to answer.

The answer, moreover, can require careful analysis of the allegations and facts of each case.  As Window World clarifies, the location of the plaintiff’s business does not automatically supply the answer.

Window World also illustrates two other tactical considerations in section 75-1.1 litigation:

  • A challenge at the pleadings stage to the application of section 75-1.1 must take into account not only the relevant choice-of-law regime, but also the Rule 12(b)(6) standard; and
  • In anticipation of a Rule 12(b)(6) fight, a plaintiff with a section 75-1.1 claim would benefit from including allegations in the complaint that concern the location of the plaintiff’s injury.

In the end, choice-of-law issues can be thorny in any type of litigation. This can be especially true—as Window World reminds us—in section 75-1.1 litigation.

Author: Stephen Feldman