Category Archives: Unfair Trade Practices

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

How a Potent Defense Can Stifle Data-Breach Lawsuits by Businesses

Consumers aren’t the only plaintiffs in data-breach litigation. Businesses sue, too.

When they do sue, businesses can be strong plaintiffs. This is because, unlike consumers, businesses usually can establish standing, since they’re more likely to have suffered direct financial loses that can be readily identified.  

This doesn’t mean, however, that a data-breach business plaintiff can waltz untouched through the Rule 12(b)(6) stage.

Instead, a business plaintiff must overcome a different defense: the economic-loss rule.  That rule prevents plaintiffs who suffer economic losses stemming from a contract from trying to recover those losses through non-contract claims. 

A recent decision from a federal court in Colorado involving one of my kids’ favorite mac-and-cheese spots shows how the economic-loss rule can apply when one business sues another over a data breach. This post studies that decision.

A Cyberattack Compromises Diners’ Payment Card Data

SELCO Community Credit Union v Noodles & Company concerns a cyberattack on the Noodles & Company restaurant chain that compromised customers’ credit and debit card information. The plaintiffs were not consumers, but instead credit unions whose cardholders dined at Noodles and whose information was compromised. They sued Noodles for failing to prevent the breach. 

According to the credit unions, Noodles breached a common-law duty to protect its customers’ payment card information by failing to implement industry-standard data-security measures. The credit unions alleged that this breach caused them damages, including the costs to cancel and reissue affected cards and to refund cardholders for unauthorized charges.

The credit union brought tort claims—all based on theories of negligence—against Noodles. Noodles filed a motion to dismiss based on the economic-loss rule, pointing to agreements it and the plaintiffs had entered as participants in the payment-card-processing ecosystem.   

The Payment Card Ecosystem: A Chain of Interrelated Contracts

The court provided the following diagram to explain this ecosystem:

ap

In its motion, Noodles observed that each actor in this ecosystem signed an agreement with at least one other actor in which it agreed to follow rules issued by the bank-card associations. Importantly, the agreements required merchants to maintain a certain level of security for payment-card data—including compliance with a set of detailed best practices for data security in the payment-card industry called the Payment Card Industry Data Security Standard (PCI DSS).

Noodles argued that these agreements also allocated the parties’ rights and responsibilities in the event of a cyberattack. More specifically, the agreements called for the credit unions to guarantee cardholders zero liability for fraudulent transactions. The credit unions, in turn, could partially recover their losses through a loss-shifting scheme managed by the bank-card associations.

According to Noodles, this arrangement reflected “a series of determinations by several sophisticated commercial entities about how the risk of fraudulent transactions should be allocated in the payment card networks.” Noodles accused the credit unions of trying to re-allocate that risk—and violating the economic-loss rule—by bringing tort claims.

An Independent Duty?

The credit unions had two main arguments in response.

First, they argued that Noodles owed them a common-law duty to secure payment-card data and to prevent foreseeable harm to cardholders. This duty, they urged, was separate and distinct from any contract-based duty to comply with PCI DSS. The credit unions made this argument to try to shoehorn their claims into what’s known as the “independent duty” exception to the economic-loss rule.

Second, the credit unions argued that the economic-loss rule should not apply because the credit unions had no contract with Noodles. Thus, the credit unions argued, they never had the chance to “reliably allocate risks and costs” with Noodles.  

The Court’s Decision

The court, like my children, sided with Noodles.

On the independent-duty argument, the court concluded that each duty that Noodles allegedly breached was bound up in the agreements to comply with the bank-card association rules and PCI DSS. Even if Noodles might also have had a common law duty to protect payment card data from a cyberattack, that duty could not be considered “independent of a contract that memorialize[d] it.”

The fact that the credit unions never contracted directly with Noodles had no analytical impact. In the court’s view, the economic-loss rule does not mandate a one-to-one contract relationship. Instead, the court reasoned, the rule asks whether a plaintiff had “the opportunity to bargain and define their rights and remedies, or to decline to enter into the contractual relationship.” The credit unions had that chance here.

Lessons for Litigants

SELCO confirms that the economic-loss rule can provide a powerful shield against attempts—including and especially by businesses—to make end-runs around negotiated limitations and allocations of liability for cyberattacks.

Defendants, however, must be ready to show that the contract on which they rely imposes relevant data-security obligations. Doing so requires that the obligations be clearly defined—well before litigation arises—in any contracts that involve the receipt or handling of sensitive information.

Clearly defining data-security obligations in contracts is already a recognized best practice for information-security risk management.  But as SELCO demonstrates, this type of clarity can also lay the groundwork for deploying the economic-loss rule against lawsuits arising from a successful cyberattack. 

Author: Alex Pearce

Failure to Hold Back Settlement Funds Subject to a Medical Lien Can Expose an Insurer to Treble Damages

A court’s decision to impose liability for committing an unfair or deceptive trade practice in a particular case may have wide-ranging implications—even when the amount in dispute in the matter itself is relatively minor.

Such is the case in Nash Hospitals, Inc. v. State Farm Mutual Automobile Insurance, Co., a recent decision by the North Carolina Court of Appeals.

In Nash, the Court of Appeals concluded that State Farm committed an unfair and deceptive trade practice in its handling of the disbursement of settlement proceeds subject to a medical lien. Although the matter arose over a hospital bill of only $757, the reasoning and holding in Nash could have broader implications for how insurers handle personal injury settlements.

State Farm settles without notifying the hospital

Jessica Whitaker was injured in an automobile accident caused by another driver. She incurred medical expenses with Nash Hospitals and two other healthcare providers following the accident.

State Farm insured the culpable driver. State Farm negotiated a settlement with Ms. Whitaker to pay a substantial portion of her medical expenses. Ms. Whitaker did not involve counsel in those negotiations.

State Farm sent a check to Ms. Whitaker for the negotiated settlement amount. The check was jointly payable to Ms. Whitaker, Nash Hospitals, and the other medical providers. Ms. Whitaker was unable to cash the check because it required the endorsement of the co-payees.

North Carolina law grants hospitals and medical providers with certain statutory rights to assert an interest in the personal injury recoveries of their patients. These statutory rights are commonly referred to as medical liens. Pursuant to N.C. Gen. Stat. § 44-50, Nash Hospitals possessed a medical lien on Ms. Whitaker’s settlement proceeds pro rata with the other healthcare providers. Under the statute, the lienholders’ recovery was capped at 50% of the total settlement. 

Nash Hospitals notified State Farm of its medical lien prior to the settlement. State Farm did not notify Nash Hospitals, however, that it had reached a settlement with Ms. Whitaker.

Nash Hospitals subsequently contacted State Farm to inquire about the status of the claim. Only then did State Farm disclose that it had reached a settlement with Ms. Whitaker and issued the joint check to her. State Farm took the position that the issuance of the joint check satisfied and extinguished any obligation it had to satisfy Nash Hospitals’ medical lien. State Farm told Nash Hospitals to contact Ms. Whitaker directly to resolve how the settlement proceeds should be divided.

After finding out about the settlement, Nash Hospitals advised State Farm that State Farm’s failure to retain funds sufficient to satisfy its lien violated the medical lien statutes. Nash Hospitals also pointed out that, by issuing a joint check to Ms. Whitaker that she was unable to cash, Ms. Whitaker would be forced to obtain an attorney and incur additional unnecessary expenses in order to actually recover any of the insurance proceeds.

Nash Hospitals sues for its share of the settlement proceeds

State Farm did not respond to the letter. Nash Hospitals then sued State Farm for violating North Carolina’s medical lien statutes. Nash Hospitals’ complaint also included an unfair and deceptive trade practices claim.

The trial court granted summary judgment to Nash Hospitals, finding that State Farm violated both the medical lien statutes and N.C. Gen. Stat. § 75-1.1.

State Farm appealed and the North Carolina Court of Appeals affirmed State Farm’s liability for both claims. The Court of Appeals remanded the case, however, to have the trial court recalculate the damages originally awarded.

The Court of Appeals determined that State Farm had a statutory duty to retain sufficient funds from the settlement to satisfy the lien claims and to distribute proceeds to the lienholders before disbursing to Ms. Whitaker.

With respect to the 75-1.1 claim, State Farm first challenged the hospital’s standing to bring the claim. State Farm argued that Nash Hospitals lacked privity with the insurer. The Court of Appeals rejected that argument. The court reasoned that Nash Hospitals was a third-party beneficiary of the insurance contract and came into privity with State Farm upon notifying State Farm of its asserted lien.

The court also found that State Farm’s failure to notify Nash Hospitals of the settlement with Ms. Whitaker, coupled with its direction that Nash Hospitals seek recovery from Ms. Whitaker herself, was both an unfair and a deceptive act.  The Court of Appeals appears to have viewed the insurer’s conduct as a species of direct unfairness. The court also indicated that the same conduct met the statutory definition of a deceptive act because State Farm’s handing of the lien claim possessed “the capacity or tendency to deceive.”

The court was careful, however, to indicate that State Farm’s violation of the North Carolina medical lien statutes did not make State Farm per se liable under 75-1.1. Rather, liability stemmed from State Farm’s underlying conduct and “its failure to cure the violation absent litigation.”

The Court of Appeals directed the trial court to enter summary judgment to Nash Hospitals for a mere $971.07 (treble the actual damages of $323.69 awarded) . Upon remand, it is possible that Nash Hospitals will also seek an attorney fee per N.C. Gen Stat. § 75-16.1.

Although it appears that State Farm will not incur a significant cash outlay in this matter, the case is likely to have broader implications for how the company handles claims settlement generally. State Farm’s counsel indicated at oral argument that the insurer routinely issued joint checks and told “the . . . parties [to] agree . . . who’s going to get what.” State Farm will presumably need to end the practice of issuing joint checks to head off potential future treble damages awards. Going forward, it also appears the burden of determining how personal injury settlement proceeds should be allocated will fall more on the insurer.

Author: George Sanderson