Category Archives: Unfair Trade Practices

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

Trust but Verify? Liability for Engaging in Transactions with an Identity Thief

After a data breach, consumers often sue to recover for injuries they suffer, or fear they will suffer, when identity thieves use the stolen data. These suits usually target the company that suffered the data breach. 

But can a company that allows an identity thief to make purchases or apply for credit in a consumer’s name using the stolen data also be subject to suit?

The U.S. District Court for the Eastern District of North Carolina recently considered that question in Rogers v. Keffer, Inc. Chief Judge James C. Dever III’s decision in Rogers raises several interesting issues. This post discusses two of them:

  • Can overlooking inconsistencies in information supplied by an identity thief to make purchases or to obtain credit in a consumer’s name give rise to liability under N.C. Gen. Stat. § 75-1.1?
  • Does disclosing stolen data supplied by an identity thief in furtherance of a fraudulent transaction constitute a “security breach” that requires notification to the affected consumer?

Gone (and Back) in 11 Days: an Unusually Brazen Car Thief

In November 2015, an impostor claiming to be Andrew Stutfield Rogers entered a Charlotte car dealership operated by Keffer, Inc. The impostor provided Rogers’s social security number and date of birth, along with a driver’s license with the name “Andrew Leon Rogers” and a nonexistent South Carolina mailing address. Rogers had not lived in South Carolina since 1992.

Keffer took this information and made inquiries into Rogers’s credit report. Keffer then used Rogers’s information to help the impostor obtain a car loan in Rogers’s name from JPMorgan Chase Bank. The impostor applied the loan proceeds to buy a car.    

Eleven days later, the impostor returned to Keffer and repeated the scheme. With Keffer’s help, he again obtained a car loan in Rogers’s name—this time from a different lender—and bought and drove away with a second car. 

Rogers, of course, didn’t know any of this when it happened.

Instead, he first learned of a problem several weeks later, when he received an email from JPMorgan that congratulated him on his new car loan. Rogers then repeatedly called JPMorgan to explain that he had not requested or authorized the loan and that his identity had been stolen.

Even after those contacts, JPMorgan continued to report the loan to credit reporting agencies as belonging to Rogers. JPMorgan also mailed two letters to Rogers that demanded he make payments on the loan. 

Rogers sued Keffer and JPMorgan (among other defendants) in Wake County Superior Court, complaining of injuries that included harm to his credit score, loss of employment opportunities, and emotional distress.  JPMorgan removed the case to federal court.   

Rogers’s claims against Keffer and JPMorgan included a section 75-1.1 claim based on their failure to recognize and to respond appropriately to the impostor’s fraudulent scheme. He also accused Keffer of violating N.C. Gen. Stat. § 75-65, which requires companies to notify individuals of security breaches that involve their personal information. 

Keffer and JPMorgan both moved to dismiss.

Unwitting Accomplice as Section 75-1.1 Defendant?

According to Rogers, Keffer violated section 75-1.1 by failing to verify the impostor’s identity and by overlooking inconsistencies in information supplied by the impostor to complete the car loan applications.

Judge Dever, however, determined the claim could not proceed on those grounds.   

Judge Dever first observed that, under North Carolina law, “wrongful and intentional” harm to a plaintiff’s credit rating and business prospects can support a claim under section 75-1.1. But he found that Rogers’s allegations against Keffer did not satisfy that standard.

Judge Dever acknowledged that Keffer’s actions may have been negligent. But, as often happens when courts confront direct unfairness claims, he concluded without much explanation that those actions were not unfair enough to violate section 75-1.1.  Rogers, he observed, simply had not shown those actions were “immoral, unethical, oppressive, or unscrupulous,” or met other formulations of the unfairness standard under the statute.

As to JPMorgan, Rogers’s section 75-1.1 claim rested on two grounds:

  • reporting the fraudulent loan to credit reporting agencies and failing to properly investigate and to correct erroneous information in its records; and
  • sending collection letters to Rogers despite multiple notifications from Rogers that the account was procured by fraud.

Relying on a 2010 opinion from the Fourth Circuit, Judge Dever held that the claim was preempted as to the first ground by the federal Fair Credit Reporting Act, under which Rogers had asserted a separate claim.  

As to the second ground, however, Judge Dever denied JPMorgan’s motion. He found that JPMorgan’s sending of collection letters to Rogers fell outside the scope of the Fair Credit Reporting Act and that the section 75-1.1 claim was not preempted insofar as it relied on that conduct. And because JPMorgan had reason to know that the loan was fraudulent before it sent those letters, the claim could proceed on that ground. 

Is Furnishing Stolen Information a Security Breach?

Rogers also alleged that Keffer violated section 75-65 by failing to notify him of a security breach involving his social security number. Notably, section 75-65 expressly states that violation of its notification requirement is a per se violation of section 75-1.1. 

According to Rogers, Keffer’s disclosure of his social security number to credit reporting agencies and banks in the course of helping the identity thief to obtain the car loans was a “security breach” for purposes of section 75-65. Keffer failed to notify him of that breach, he argued, and therefore violated the statute.

Judge Dever dismissed the claim. In doing so, however, Judge Dever did not directly address whether Keffer’s unwitting disclosure of Rogers’s social security number to other parties in furtherance of the impostor’s scheme qualified as a “security breach” giving rise to a duty to notify Rogers.

Even assuming it did, he reasoned, Rogers could not show that Keffer’s failure to notify him proximately caused Rogers any injury. Rogers discovered the fraud before Keffer discovered it; indeed, Rogers notified Keffer about the fraud. And Rogers could not point to any expenses that he could have avoided had Keffer found the fraud first and notified him.  

Lessons from Rogers

The prospect of recovery under 75-1.1 is no doubt attractive to consumers unwinding the effects of identity theft in the wake of a data breach. Judge Dever’s decision, however, indicates that these types of claims face an uphill battle. 

According to Rogers, they must allege more than a mere failure to recognize a thief’s scheme, even when the facts suggest it should have been obvious. Once a company has actual notice that fraud has occurred, though, continuing to act as if it has not may well be enough. 

As for per se claims premised on section 75-65, Rogers leaves open the intriguing question whether its breach notification requirement applies to companies who unwittingly share stolen information after an identity thief comes to call. But if a notification obligation does apply, Rogers confirms that would-be plaintiffs must allege specifically how they were harmed by the defendant’s failure to comply.

Author: Alex Pearce

Further Closing the Narrow Opening for Section 75-1.1 in the Employer-Employee Context

A recent opinion from the North Carolina Business Court illustrates courts’ continued reluctance to allow section 75-1.1 claims in the context of an employer-employee relationship. Judge James L. Gale recently dismissed a N.C. Gen. Stat. § 75-1.1 claim that arose from an employment relationship that had evolved into a business partner and buyer-seller relationship.

In Urquhart v. Trenkelbach, Judge Gale accepted the defendants’ contention that their actions all involved the internal operations of the company, and thus were not “in or affecting commerce.” 

Just When I Thought I Was Out, They Pulled Me Back In

In 2007, Curtis L. Trenkelbach recruited Christopher J. Urquhart to work for Trenkelbach’s commercial construction company.

Trenkelbach was the sole owner of the company.  He apparently wanted an exit strategy, and he saw a potential successor in Urquhart.  The two orally agreed to a succession plan through Urquhart’s gradual purchase of Trenkelbach’s shares.

To facilitate the succession, Trenkelbach and Urquhart formed a new LLC.  The members of the LLC included Trenkelbach, Urquhart, and a separate corporation formed to allow Urquhart to increase his ownership interest in the company.

As part of the formation of the LLC, Trenkelbach and Urquhart executed several agreements.  The operating agreement required cause before a manager could be removed.  Likewise, Urquhart’s employment agreement restricted termination to situations where there was cause.

Initially, things went well. 

The business flourished, and Trenkelbach’s faith in Urquhart proved warranted.  Over five years, the company’s revenues quadrupled.  The tremendous success also accelerated Urquhart’s succession to ownership, which was tied to company performance.

The success may have also caused Trenkelbach to reconsider his departure. 

Urquhart alleged that Trenkelbach orchestrated a scheme to force Urquhart’s ouster by manufacturing cause for termination, removing him as a manager, terminating his employment, and exercising a provision that allowed Trenkelbach to repurchase Urquhart’s ownership interest in the company.

The Alexander v. Alexander Exceptions Remain Narrow

Urquhart brought a dozen claims against Trenkelbach, including the section 75-1.1 claim.

He premised the section 75-1.1 claim on allegations that Trenkelbach forced him out of management, attempted to manipulate the succession agreement, terminated Urquhart’s employment, and wrongfully diverted company funds.

Trenkelbach moved to dismiss.  He argued that the conduct took place solely within the confines of the company, so the conduct was not “in or affecting commerce.”

Judge Gale first reviewed the landscape of section 75-1.1 cases involving employer and employee. 

He relied on the reasoning of the Court of Appeals in its 2016 decision in Alexander v. Alexander.  In that case, the Court of Appeals determined that a section 75-1.1 claim could lie—even in an employer-employee context—if the claims involved outside businesses, distinct corporate entities, or the interruption of a commercial relationship between two market participants.

From these facts, Urquhart’s claim might appear to fit within one of these exceptions, given that the dispute involved two separate corporate entities (albeit entities formed for a related purpose).  Urquhart had his own, separate company created to purchase shares of the primary company.

However, Judge Gale did not find that Trenkelbach’s conduct met any of the Alexander exceptions.  Instead the facts more closely resembled cases that declined to allow a section 75-1.1 claim:

  • Urquhart’s termination involved conduct internal to the company.
  • Any diversion of company funds was an internal issue and not affecting commerce.
  • Finally, any actions relating to the succession plan related only to an internal agreement between managing members of the company. Therefore, any violation of that agreement also occurred internally, within the confines of a company.

Having determined that no conduct occurred outside the internal dealings of the company, Judge Gale dismissed the claim. 

As an alternative ground for dismissal, Trenkelbach had argued that the conduct underlying the section 75-1.1 claim arose out of the breach of a contract.  Having determined that the conduct was not in or affecting commerce, Judge Gale did not reach this issue.

The Uphill Battle for Any Section 75-1.1 Claim Involving an Employer-Employee Relationship

Even with good ammunition—including the sale of a company and separate corporate entities—Urquhart could not plead a section 75-1.1 claim. 

Would-be section 75-1.1 plaintiffs in the employment context need a hook outside the internal company dynamics to try and wedge the claim into the narrow exceptions spelled out in Alexander.  In Trenkelbach, one potential possibility might be the activities of the other companies—did any have some external purpose, not solely tied to the purchase of ownership in Trenkelbach’s company?  Any external purpose might have given the plaintiff that extra hook.

Absent that type of pleading, these types of claims will continue to be dismissed.

Author: Jeremy Falcone