Author Archives: Stephen Feldman

Playing Chicken with Claims for Unfair Trade Practices

The past year has seen several notable decisions concerning how choice-of-law regimes can affect the viability of a claim for violation of N.C. Gen. Stat. § 75-1.1.

Today’s post involves another case on this topic.

In Koch Foods, Inc. v. Pate Dawson Company, a federal district court assessed a claim for unfair trade practices by the seller of processed poultry against directors and officers of a distributor that bought the seller’s poultry.

This post studies the court’s meaty decision.

I’ll Buy, But Who’s Paying?

Koch sold processed poultry to Pate Dawson Company. Dawson, in turn, sold the poultry to restaurants. Its top customer was Bojangles.

When Dawson delivered the poultry to Bojangles, Bojangles would pay Dawson the cost of the poultry, plus the cost of shipping. Dawson would then pay Koch a portion of what Dawson received from Bojangles.

In September 2015, Bojangles ended its relationship with Dawson. That decision put Dawson in financial peril.

After Bojangles cut the cord, however, Dawson continued to order poultry from Koch. In the three months following the end of its relationship with Bojangles, Dawson placed 38 orders with Koch for products worth $3.6 million.

Dawson paid the first $106,000 of that amount, but no more.

Koch then sued Dawson and the company’s officers. Koch alleged that the officers never intended to pay for the $3.6 million in poultry. Koch’s claims included a claim for unfair and deceptive trade practices.

Koch settled its claims with Dawson, but not its claims with the officers. Koch and the officers each moved for summary judgment on the claim for unfair trade practices.

A Most Significant Inquiry into the Applicable Choice of Law

Koch filed the case in Mississippi federal court on diversity grounds, but no party is a Mississippi citizen. Koch has its principal place of business in Illinois. (Koch is the majority member of Koch Foods of Mississippi, LLC, which sold the poultry to Dawson.) The officers all live in North Carolina, which was also Dawson’s principal place of business.

The court’s first order of business was to discern what state’s law applies to the claim for unfair trade practices. To do that, the court turned to Mississippi’s conflict-of-law rules.

Before doing so, the court noted that an actual conflict exists between the laws of Mississippi and North Carolina on unfair trade practices. Each state has its own analogue of Section 5 of the FTC Act. Mississippi’s statute, however, applies only to consumer transactions, and not to business-to-business transactions.

For claims for unfair trade practices, Mississippi law applies the “most significant relationship” test. (Notably, two recent decisions in North Carolina—one from a federal district court, and one from the North Carolina Business Court—show that North Carolina’s choice-of-law regime is more likely to apply a different test, the lex loci test, to claims for unfair trade practices.)

Under the “most significant relationship” test, as it applies under Mississippi law, the court turned to the following four factors to discern which state’s law has the most significant relationship to the relevant conduct and the parties:

  1. the place where the injury occurred;
  1. the place where the conduct that caused the injury occurred;
  1. the domicile, residence, nationality, place of incorporation, and place of business of the parties; and
  1. the place where the relationship between the parties is centered.

The “most significant relationship” test then calls for the evaluation of these contacts in light of seven more choice-of-law considerations. These considerations include “the needs of the interstate and international systems” and “the protection of justified expectations.”

Having laid out these “guideposts”—some of which the court itself described as “nebulous”—the court placed the most weight on the second factor: the place where the conduct that caused the injury occurred. That conduct occurred in North Carolina. The court concluded that North Carolina’s interest in regulating the conduct within its borders outweighed any policy or interest of Mississippi.

Would the lex loci test have yielded the same result? It’s not clear. As the Business Court recently explained, the place that a plaintiff suffered its pecuniary loss is not necessarily where the plaintiff has its principal place of business.

A Dispute of Facts

Having concluded that the law on section 75-1.1 applies to Koch’s claims, the court reasoned that buying $3.6 million of a product without the means or intent to pay for it violates section 75-1.1.

In reaching this conclusion, the court effectively ruled that this conduct amounted to substantial aggravating circumstances. As the Business Court recently explained in Post v. Avita Drugs, deception in a contract’s formation is a “classic example of an aggravating circumstance.”

This conclusion, however, did not mean that the court granted offensive summary judgment in Koch’s favor. The parties had conflicting facts about whether Dawson actually lacked the means or intent to pay for the poultry products, and a jury must resolve that factual dispute.

Considerations for 75-1.1 Claims Concerning Multistate Conduct

Koch Foods is an instructive case for litigators and businesses involved in claims of unfair trade practices that cross state lines.

First, in litigation on unfair trade practices, the choice of forum matters. In Koch Foods, the viability of a claim for unfair trade practices required a forum in which section 75-1.1—because its reach is not limited to consumer transactions—would apply. Mississippi’s choice-of-law regime, which applies the “most significant relationship” test, led to that outcome.

Second, Koch Foods is another data point that emphasizes that the facts concerning contract formation can be a fertile area for proving “substantial aggravating circumstances.”

Finally, the court’s ultimate ruling—that a trial is needed to determine Dawson’s financial condition and intent during contract formation—underscores the role of the factfinder in section 75-1.1 litigation. Even though whether a set of facts actually violates section 75-1.1 is a legal question, each litigant must be ready to persuade a factfinder that its set of facts constitutes the truth.

Author: 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