Author Archives: Stephen Feldman

Section 75-1.1 Claims and Conduct by Government Employees

A recent decision of the North Carolina Court of Appeals highlights an unusual issue:  Does N.C. Gen. Stat. § 75-1.1 apply to conduct by a government employee in a claim brought by his employer, a government entity?

In County of Harnett v. Rogers, Harnett County accused a former employee of obstructing various public-utility projects. The trial court granted offensive summary judgment in the County’s favor on its claim against the former employee, Randy Rogers, for violation of section 75-1.1.

On appeal, Rogers argued that section 75-1.1 does not apply to disputes involving a government entity and one of its employees. In response, the County argued that section 75-1.1 applies to any conduct that affects commerce and that Rogers’s conduct affected commerce.

This post studies how the Court of Appeals resolved these competing arguments.

Making a Mess of Sewer Line Projects

Rogers served as a right-of-way agent for the Harnett County Department of Public Utilities. In that job, Rogers acquired easements for water and sewer lines in connection with public-utility projects.

In 2010 and 2011, the County experienced problems acquiring easements on certain projects. Those problems caused delays, and those delays cost the County money. The County ultimately hired a law firm to investigate potential corruption within the department.

The investigation concluded that Rogers caused some of the issues related to the easements. Unsurprisingly, the County fired Rogers. The County then found a flash drive and County-issued laptop that contained hundreds of hours of audio recordings that Rogers surreptitiously recorded. The recordings confirmed that Rogers had stolen documents from the County and had attempted to sabotage certain projects.

The County sued Rogers for fraud and violation of section 75-1.1. The trial court granted the County’s motion for summary judgment on these claims.

Does the Nature of Employee Interactions Determine Section 75-1.1 Liability?

In his opening brief, Rogers argued that section 75-1.1 does not apply to disputes involving a governmental entity and one of its employees. Rogers emphasized that the General Assembly enacted section 75-1.1 to protect consumers against unfair and deceptive business practices. Allowing the government to sue private citizens under section 75-1.1, Rogers wrote, would be “an exponential expansion” of government power.

The County responded by citing cases in which our appellate courts have allowed a government entity to sue for violations of section 75-1.1. The County cited Marshall v. Miller, a 1981 decision in which the North Carolina Supreme Court wrote that the scope of section 75-1.1 does not change based on whether the plaintiff is public or private. The County also cited F. Ray Moore Oil Co. v. State, a 1986 decision of the Court of Appeals holding that the State can sue under N.C. Gen. Stat. § 75-16.

The County also argued that the operation and maintenance of water and sewer lines is a proprietary function, not a governmental function, and that the County competed with private enterprise in performing that function. According to the County, this point showed that Rogers’s conduct to obstruct this proprietary function affected commerce and therefore fell within the ambit of section 75-1.1.

In its decision, however, the Court of Appeals started with a different standard than those presented in the parties’ briefs: it instructed that section 75-1.1 applies to conduct that occurs in interactions between businesses and between businesses and consumers.

The Court of Appeals then assessed whether Rogers’s conduct fell within either category of interactions.

The Court reasoned that, when Rogers made false statements to the County, those statements could not be characterized as interactions between market participants. Instead, those statements should be characterized as conduct internal to a business—conduct that section 75-1.1 does not cover.

Rogers’s bad conduct, however, extended beyond misrepresentations to his employer. He also made misrepresentations to a project engineer and to a consulting firm involved with the projects, and he met with property owners to undermine the completion of many projects.

The Court of Appeals concluded that these interactions with persons and entities other than the County fell within the conduct covered by section 75-1.1. According to the Court of Appeals, this conduct was closer in nature to the “buyer-seller relations” that fall within section 75-1.1’s purview.

In reaching this conclusion, the Court of Appeals cited to the North Carolina Supreme Court’s decision in Sara Lee Corp. v. Carter. In Sara Lee, a corporate employee engaged in self-dealing when he developed separate businesses that supplied his employer with computer parts and services at high costs—all concealed from his employer. The Supreme Court held that section 75-1.1 applied to the employee’s conduct because the conduct concerned a buyer-seller transaction.

According to the Court of Appeals, Rogers’s conduct with individuals and entities other than his employer was comparable to the conduct of the employee in Sara Lee.

Finally, the Court of Appeals clarified its ruling by noting that Rogers’s failure to obtain easements from property owners does not violate section 75-1.1. The Court reasoned that the failure to act is not, by definition, a “dealing” of any sort.

Potential Reverberations

The Rogers decision raises substantial questions about the interpretation and application of section 75-1.1.

In particular, the decision appears to interpret Sara Lee to extend the scope of section 75-1.1 to employee conduct with a third party, even if the employee does not actually transact business with the third party. In Sara Lee, the defendant-employee transferred corporate funds to his own business. In contrast, the defendant-employee in Rogers did not buy from or sell to a third party.

For a few reasons, however, the lasting effects of Rogers are unclear.

First, the Court of Appeals reversed summary judgment on the County’s fraud claim because of genuine issues of material fact. The Court, in turn, reversed summary judgment on the 75-1.1 claim itself because that claim rested on the same facts as the fraud claim. Thus, for the case to have a continuing appellate heartbeat, it will likely need to survive another trial and reach the Court of Appeals again.

Second, the Court of Appeals designated Rogers as an unpublished decision. This designation does not stop a party from arguing that the reasoning in Rogers is persuasive, but Rogers is not controlling legal authority.

Third, as we have seen, the North Carolina Business Court has issued several opinions that draw the line on what conduct by a former employee can violate section 75-1.1. Decisions of the Business Court must now be appealed directly to the North Carolina Supreme Court. Thus, the next definitive—and controlling—word on this important area of 75-1.1 jurisprudence might well come from the Supreme Court.

Author: Stephen Feldman

An Important New Decision on Whether Section 75-1.1 Applies to Multistate Conduct

Last week, the U.S. District Court for the Middle District of North Carolina issued a meaty decision about N.C. Gen. Stat. § 75-1.1. The decision, in a case called SmithKline Beecham Corp. d/b/a GlaxoSmithKline v. Abbott Laboratories, merits a close read by all North Carolina business litigators.

In the decision, Judge William Osteen, Jr. assessed, and ultimately rejected, Abbott’s motion for judgment on the pleadings on GSK’s section 75-1.1 claim. Abbott contended that either Pennsylvania or New York law governs GSK’s claim. Because neither Pennsylvania nor New York law recognizes unfair-trade-practices claims outside of the consumer-protection context, Abbott argued that GSK cannot pursue its section 75-1.1 claim.

The choice-of-law rule in North Carolina for section 75-1.1 claims is unsettled. Judge Osteen therefore addressed two questions:

  1. What choice-of-law rule should apply to GSK’s section 75-1.1 claim?
  1. Under the selected rule, what law governs? North Carolina, Pennsylvania, or New York?

This post analyzes Judge Osteen’s decision.

A “Lump of Coal” Yields a Lawsuit for Treble Damages

The GSK case concerns a drug manufactured by Abbott to treat HIV infection. The drug, called Norvir, is a protease inhibitor. Norvir can prevent immature HIV from becoming a mature virus.

When paired with other protease inhibitors, Norvir can improve patient outcomes related to HIV. For this reason, GSK relied on Norvir’s availability when GSK developed its own protease inhibitors.

In 2002, Abbott and GSK entered into a license agreement to allow GSK to promote Norvir with GSK’s protease inhibitors. New York law governed the agreement.

GSK then introduced a new protease inhibitor to be used specifically with Norvir. Two weeks after this introduction, however, Abbott raised the price of Norvir by four-hundred percent. In its lawsuit, GSK alleged that this price increase prevented GSK from promoting its new protease inhibitor at a competitive price, and thereby caused GSK to lose market share.

GSK also alleged that, during contract negotiations, Abbott concealed its plan to hike prices. As some evidence of this allegation, GSK pointed to a statement by a senior Abbott executive after the price increase, in which the executive congratulated his Abbott colleagues on “giving a lump of coal to . . . GSK for the holidays.”

Choosing a Choice-of-Law Rule for Section 75-1.1 Claims

GSK sued Abbott for violation of section 75-1.1. GSK filed the case in federal court in California. The California court later transferred the case to the Middle District.

Abbott then filed a motion for judgment on the pleadings. Abbott argued that, under North Carolina’s choice-of-law rules (which apply in federal court), GSK could not pursue a section 75-1.1 claim. According to Abbott, the laws of either Pennsylvania (GSK’s corporate headquarters) or New York (the law that governs the license agreement) apply to the claim. Abbott reasoned that GSK cannot pursue its 75-1.1 claim because Pennsylvania and New York do not permit a business to assert an unfair-trade-practices claim against another business.

Abbott’s motion teed up an unsettled, but critical, issue in 75-1.1 jurisprudence: What choice-of-law rule applies to section 75-1.1 claims?

The issue is unsettled because (a) the North Carolina Supreme Court has not addressed the issue, and (b) the North Carolina Court of Appeals has issued conflicting decisions:

  • Some decisions apply the lex loci test. Under that test, the court applies the law of the state where the claimant was injured.
  • Other decisions apply the most significant relationship test. Under that test, the court applies the law of the state having the most significant relationship to the occurrence that gave rise to the action.

Judge Osteen’s opinion goes into some depth about which courts have applied which test. He noted that federal courts appear to favor the lex loci test. He also noted that at least two Fourth Circuit decisions apply the most significant relationship test if the place of injury is unclear.

After reviewing these decisions, Judge Osteen applied the lex loci test. He concluded that, under that test, North Carolina law governs GSK’s section 75-1.1 claim.

To reach this conclusion, Judge Osteen explained that the place of injury in a section 75-1.1 claim is the state where the last act occurred that gave rise to the injury. Here, GSK’s injury is lost market share and lost profits. The parties disagreed about where GSK suffered that injury. Abbott pointed to Pennsylvania, site of GSK’s corporate headquarters. GSK pointed to North Carolina, site of its HIV business.

Which argument won the day? Judge Osteen essentially left the question open. He explained that GSK had plausibly pleaded that GSK suffered its injury in North Carolina, and that that allegation was enough at the Rule 12 stage to deny the motion.

After deciding to apply the lex loci test, however, Judge Osteen then said that the most significant relationship test would yield the same result. He explained that the key factor in that test is the place where the relationship between the parties is centered. Here, the relationship between GSK and Abbott was centered in North Carolina. That is because GSK operates its HIV-drug operations out of its North Carolina offices. In addition, those offices were the site of the alleged misrepresentations. These facts outweighed the fact that Pennsylvania was GSK’s corporate headquarters.

As a final step in the choice-of-law analysis, Judge Osteen rejected Abbott’s argument that New York law—the law that governs the licensing agreement—applies to GSK’s unfair-trade-practices claim.

Judge Osteen first explained that, because a section 75-1.1 claim does not require a contract, a choice-of-law clause in a contract is not dispositive of what law applies to the claim.

Judge Osteen then showed that the choice-of-law clause in the license agreement does not apply to a section 75-1.1 claim in any event, because GSK’s 75-1.1 claim does not rely on the validity or enforceability of any provision in the agreement.

Making Wise Choices when the Choice of Law Is Uncertain

As Judge Osteen’s opinion shows, the operative choice-of-law regime can have enormous stakes in section 75-1.1 litigation. How can a 75-1.1 claimant deal with the uncertainty in North Carolina’s regime?

First, the claimant can allege facts that would carry the day regardless of which test applies. In many cases, like the GSK case, the same facts are critical to both tests.

Second, a section 75-1.1 claimant can discern what evidence its adversary might marshal that would bear on choice of law. A claimant can then tailor its interrogatory responses, and prepare its deposition witnesses, to avoid volunteering points that might have negative consequences in a choice-of-law analysis.

Third, a 75-1.1 claimant should assess the extent to which its theory is intertwined with any contract that has a choice-of-law provision. In the GSK case, a misrepresentation claim related to contract negotiations fell outside of the contract’s choice-of-law provision. An aggravated-breach claim, in contrast, might well be subsumed in a contract’s choice-of-law provision.

High-stakes commercial litigation often features interstate transactions and communications. As the GSK decision shows, the availability of treble damages can hinge on whether and how a complaint describes the nitty-gritty of those transactions and communications.

Author: Stephen Feldman

A New Front for the Blog: Consumer Protection and the Law on Privacy and Data Security

Since this blog’s inception, we’ve primarily concentrated our posts on the law under N.C. Gen. Stat. § 75-1.1, a mainstay of business and consumer disputes in North Carolina. We’ve been gratified by the positive feedback from our readership as we write about novel developments in consumer-protection law.

With an eye toward those novel developments, we write today to announce an expansion of the blog’s substantive focus to another critical area of consumer-protection law: the law on privacy and data security. 

Indeed, privacy and data-security litigation has become one of the most concerning areas of consumer protection for corporations and their in-house counsel. Privacy and data-security litigation features many of the same characteristics as the law that governs section 75-1.1—including and especially the application of open-ended concepts of unfairness, deception, and consumer injury.

Our posts on privacy and data security will be authored by our colleague Alex Pearce. Alex has deep experience and first-rate credentials in both complex business litigation and the law on privacy and data security. A Stanford Law School graduate, Alex clerked for Judge Milton I. Shadur in federal court in Chicago, and then practiced business litigation at Winston & Strawn and Ellis & Winters. Alex later moved to SAS, where he served as the company’s privacy counsel, before re-joining Ellis & Winters this past January.

As to our schedule going forward:

  • We’ll publish our posts on privacy and data-security law on the third Tuesday of each month, the first one being on March 21.
  • Section 75-1.1 devotees need not worry that our new coverage will mean that we’ll cover that statute any less frequently. We’ll continue to make our regularly-scheduled section 75-1.1 posts on the second and fourth Tuesday every month.

We look forward to this next chapter in the blog’s development.   As always, we invite your ideas on topics that we should address.