Author Archives: 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

How to Win Attorney Fees When Defending an Unfair-Trade-Practices Claim

A prevailing defendant on a claim for violation of N.C. Gen. Stat. § 75-1.1 can obtain attorney fees, but the bar is high.  The defendant must show that the plaintiff knew or should have known that the action was both frivolous and malicious.

What facts can satisfy these standards? The recent North Carolina Business Court decision in Sloan v. Inolife Technologies gives some answers.

This post studies the facts, reasoning, and conclusion in Sloan—a decision that might dissuade some litigators from tacking a section 75-1.1 claim onto future complaints as a matter of course.

Step 1:  Make a Credible Threat for Fees

Sloan concerned a fight about a company’s stock. The complaint contained a standard array of claims for a stock dispute, including a section 75-1.1 claim.   

In a letter, the defendants’ counsel asked the plaintiffs’ counsel to withdraw the 75-1.1 claim. The defendants’ counsel pointed to the exemption to section 75-1.1 for disputes involving securities transactions. The letter cited eight North Carolina decisions that applied the securities exemption. The letter then asserted that the defendants would seek attorney fees under section 75-16.1 if the plaintiffs refused to withdraw the claim.

The plaintiffs’ counsel wrote back. He argued that the 75-1.1 claim concerned the theft of stock, and not a securities transaction. He also argued that the complaint’s allegations about the defendants’ breach of fiduciary duty constituted independent grounds to support a section 75-1.1 claim.

The defendants filed a motion to dismiss. One week later, the plaintiffs voluntarily dismissed the 75-1.1 claim without prejudice.

The defendants then followed through on their original threat: they filed a motion for attorney fees under section 75-16.1.

Step 2:  Follow Through On the Threat with Well-Established Caselaw

Judge Michael Robinson concluded that the Sloan plaintiffs knew or should have known that their section 75-1.1 claim was frivolous and malicious.

First, Judge Robinson cited back to the North Carolina Supreme Court’s decisions in Skinner v. E.F. Hutton & Co. and HAJMM v. House of Raeford Farms —decisions that established the securities exemption—to show that the plaintiffs raised a frivolous claim. Judge Robinson included block quotes from HAJMM in which the Supreme Court explained the reasons for the exemption.

Judge Robinson then showed that the plaintiffs’ entire complaint concerned the issuance of different types of securities. He quoted HAJMM to confirm that “[s]ecurities transactions are related to the creation, transfer, or retirement of capital.” The complaint in Sloan fell comfortably within that definition.

Judge Robinson then addressed the plaintiffs’ argument that their section 75-1.1 claim concerned a breach of fiduciary duty and therefore fell outside of the securities exemption. In that argument, the plaintiffs relied on a recent Business Court decision called KURE Corp. v. Peterson.

In Kure Corp., the defendants asked for Rule 11 sanctions based on the plaintiff’s assertion of a section 75-1.1 claim, which the defendants argued fell within the securities exemption. The Business Court, however, concluded that existing law warranted the 75-1.1 claim in Kure Corp. for two reasons. First, the claim rested on allegations beyond the purchase and sale of securities. Second, certain North Carolina decisions have upheld 75-1.1 violations based on the breach of a fiduciary duty, which the plaintiff had alleged.

As Judge Robinson pointed out, the complaint in Sloan did not raise any substantive allegations about a breach of fiduciary duty. Indeed, the Sloan complaint did not even include a claim for breach of fiduciary.

Finally, Judge Robinson turned to the timing of the Sloan plaintiffs’ conduct. The plaintiffs’ counsel’s response to defense counsel’s letter stridently accused the defendants of “commit[ting] larceny and theft with impunity.” The letter also asserted that “[t]here is nothing frivolous and malicious about” the 75-1.1 claim. One month later, however, the plaintiffs voluntarily dismissed the claim. At the hearing on the motion, the plaintiffs’ counsel revealed that he waited one month to dismiss the claim because he was waiting to see if, in fact, the defendants would file a motion to dismiss the claim. This sequence and admission confirmed that the plaintiffs knew they asserted a frivolous claim.

On this basis, Judge Robinson concluded that the defendants should be awarded their reasonable attorney fees incurred in defending against the 75-1.1 claim.

Step 3:  Prepare Your Petition for Fees

Judge Robinson ordered that the defendants prepare a petition for fees supported by proper affidavits. Notably, Judge Robinson’s order encouraged defendants’ counsel “to carefully segregate their time and costs associated strictly and solely with opposing Plaintiffs’ UDTP claim” after their receipt of the plaintiffs’ counsel’s letter. 

This point underscores the importance of detailed timekeeping practices if a lawyer believes that her client might be entitled to 75-1.1 fees down the road.

Overall, the Sloan case contains several forceful lessons:

  • A 75-1.1 plaintiff might be responsible for fees if his claim tries to tiptoe around well-established law.
  • Alleging a 75-1.1 claim for leverage, just to see if the claim is opposed, will not help the claimant’s argument against fees. This is an especially significant point, given how many 75-1.1 claims are asserted in North Carolina business litigation.
  • A 75-1.1 defendant who wants to recover fees must be deliberate in her efforts to do so. The deliberate steps should include (1) documenting why the claim is frivolous and malicious, (2) giving the claimant an opportunity to explain himself, and (3) keeping meticulous timekeeping records of these and other efforts to defend the claim.

Judge Robinson’s order contains one additional nugget of intrigue:  a statement that “securities transactions are beyond the scope of section 75-1.1 whether such transactions give rise to a breach of fiduciary claim or not.” As this point and the decision in Kure Corp. suggest, the interplay among the securities laws, the law on fiduciary duties, and section 75-1.1 might be a fertile source for further clarification—perhaps in future motion practice on attorney fees.

Author: Stephen Feldman