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

Offers You Make May be Used against You: Free Credit Monitoring and Standing in Data Breach Cases

It’s become an unfortunate rite of passage for the modern age: the receipt of a letter from a company explaining that one’s personal information been lost or stolen in a data breach.

The letter usually offers to provide free credit monitoring or identity-theft insurance through a third-party vendor. The law usually does not require this type of offer, but companies do it anyway. One reason may be because these types of offers have been shown to reduce the chance of consumer lawsuits.

But if consumers do sue, can the company’s offer be used against it? 

This post addresses this question, one recently addressed by three federal appellate courts. As we’ll see, those courts analyzed whether the plaintiffs had Article III standing, a key issue in data-breach litigation.

Standing in data breach cases

In a typical data-breach case, individuals sue the breached company before thieves have misused their data. The alleged injury, then, is usually an increased risk of future fraud or identity theft.

Future harm, however, is often not enough to establish Article III standing in federal court. In Clapper v. Amnesty International, the U.S. Supreme Court confirmed that an alleged “future injury” constitutes an injury-in-fact—and satisfies Article III standing—only if that future injury is “certainly impending.”

This standard, the Supreme Court explained, does not always mean “literally certain.” Instead, a court may find standing based on a showing of “substantial risk” that harm will occur, “which may prompt the plaintiffs to reasonably incur costs to mitigate or avoid that harm.” 

Federal courts assessing standing in recent data-breach cases have turned to Clapper and the “substantial risk” standard. The Seventh Circuit’s decision in Remijas v. Neiman Marcus and the Sixth Circuit’s decision in Galaria v. Nationwide are two leading examples. In both cases:

  • the defendants suffered breaches of their networks by hackers who targeted and stole customers’ personal information;
  • the defendants sent consumers notification letters that included an offer to provide free credit monitoring and identify-theft protection insurance; and
  • the plaintiffs’ injuries consisted in part of an alleged risk of future identity theft.

On these facts, the district courts in both dismissed the plaintiffs’ claims for lack of standing. The appeals, however, yielded different results.

In Remijas, the Seventh Circuit concluded that the threat of future harm, and expenditures made by the plaintiffs to protect against that threat, established standing under Clapper. The Seventh Circuit focused specifically on “telling” evidence that Neiman Marcus had offered free protective services to consumers after the breach. The cost of that offer was not de minimis, the court noted. According to the Seventh Circuit, Neiman Marcus would not have offered the services if the risk to the plaintiffs were so “ephemeral” that it “could safely be disregarded.” 

Interestingly, the plaintiffs’ brief never argued this point.  It only appears to have arisen in questioning by Chief Judge Diane Wood, the author of the court’s decision, at oral argument

The Sixth Circuit followed the same reasoning in Galaria. It concluded that the plaintiffs’ allegations of a substantial risk of harm, coupled with reasonably incurred mitigation costs, were sufficient to overcome a Rule 12(b)(1) motion. The Sixth Circuit relied in part on the defendant’s offer of free credit monitoring, reasoning that the offer must reflect the severity of the risk.

In doing so, the Sixth Circuit rejected the company’s public-policy argument: companies might stop offering these free services if the offers themselves give rise to lawsuits.

Beck v. McDonald: Don’t punish good deeds.

A third recent appellate case, however, is more favorable for defendants.

In Beck v. McDonald, the Fourth Circuit considered whether individuals had standing to assert claims arising from data breaches at a Veterans Affairs hospital. One breach was caused by the theft of a laptop containing patients’ unencrypted personal information. Another breach was caused by the theft or misplacement of four boxes of pathology reports. In each case, hospital officials notified affected individuals of the breach and offered free credit monitoring. 

Individuals affected by each incident filed separate class actions against the Secretary of Veterans Affairs and hospital officials. In each case, the plaintiffs’ alleged injuries consisted of the threat of future identity theft and measures taken to mitigate that threat.  In each case, the district court relied on Clapper to dismiss the plaintiffs’ claim for lack of standing.

On appeal, the plaintiffs turned to Remijas. They emphasized that the expenditure of federal funds on credit monitoring showed a substantial risk of harm to the plaintiffs. 

The Fourth Circuit, however, sidestepped this argument. Instead, the court distinguished Remijas and Galaria on the ground that those cases involved thieves who intentionally targeted personal information. In Beck, by contrast, there was no evidence the missing laptop or pathology reports were taken because of the personal information they contained. 

In addition, the Fourth Circuit adopted the very public-policy point that the Sixth Circuit disregarded in Galaria. The Fourth Circuit reasoned that, if an offer to provide free credit monitoring services is interpreted to imply a substantial risk of harm, organizations would be discouraged from offering these valuable services.

Implications for Companies

Remijas and Galaria deserve some consideration by companies deciding whether to offer free credit monitoring in the wake of a data breach.  But in most cases the benefits of offering these services—meeting customer expectations, preserving goodwill, and possibly avoiding the filing of an action—will outweigh the risk.  That’s especially true now that a defendant can turn to the Fourth Circuit’s decision in Beck if plaintiffs try to turn its generosity against it. 

Author: Alex Pearce

Can a Lender’s Failure to Provide a Promised Refinancing be an Unfair or Deceptive Trade Practice?

When a borrower asserts an alleged violation of N.C. Gen. Stat. § 75-1.1 against a lender, the claim often presents a familiar fact pattern. Frequently, the borrower alleges that the lender promised to refinance or modify the borrower’s loan and then broke that promise, causing injury to the borrower.

A borrower who asserts this type of claim usually faces several substantial hurdles to avoid dismissal or summary judgment. In Hetzel v. JPMorgan Chase Bank, N.A., however, a borrower’s 75-1.1 claim based on a bank’s alleged broken promise to refinance a real estate loan survived summary judgment.

This post analyzes Hetzel. For reasons that I’ll explain, the somewhat unique fact pattern led to a decision by United States District Court Judge Terrence W. Boyle that may have limited application in future cases.

The bank pays off the wrong mortgage

In Hetzel, the borrower owned multiple coastal properties. Those properties secured multiple loans to JPMorgan Chase Bank. The borrower started the process of refinancing the loans with another lender. The borrower thought that he could obtain better loan terms with the other lender.

The borrower successfully obtained a refinancing commitment from the new lender on one of the properties. The new lender sent the refinancing proceeds to JPMorgan to pay off JPMorgan’s mortgage on that property. Unfortunately, JPMorgan inadvertently paid off the mortgage on one of the borrower’s other properties, and not on the refinanced property.

Compounding the mistake, the borrower stopped making payments to JPMorgan for the mortgage on the refinanced property. The borrower claimed that he was unaware that the first mortgage had not been paid off.

Once he stopped paying on the first mortgage, the loan fell into arrears, and JPMorgan started foreclosure proceedings. JPMorgan also reported the borrower’s payment delinquencies to credit bureaus.

Eventually, the borrower discovered the payoff error and demanded that JPMorgan fix the problem.  The bank worked to correct the misapplication of the proceeds. But the borrower alleged that JPMorgan further promised that it would refinance the borrower’s other properties should the other lender be unwilling to proceed with refinancing because of the error (i.e. because of the loan delinquencies JPMorgan erroneously reported).

Ultimately, neither JPMorgan nor the other lender refinanced the remaining loans. The borrower disputed his ongoing payment obligations to JPMorgan, and JPMorgan commenced foreclosure proceedings. 

Among other defendants, the borrower then sued JPMorgan. The borrower asserted multiple claims against the bank, including a 75-1.1 claim based on JPMorgan’s alleged promises to the borrower that it would refinance the borrower’s remaining properties but failed to do so. The borrower alleged that JPMorgan’s promises were false and made “in an unfair attempt to delay plaintiff from seeking legal redress.” 

The borrower filed his suit in Carteret County Superior Court. With the consent of the other defendants, JPMorgan removed the case to the United States District Court for the Eastern District of North Carolina.

The borrower’s 75-1.1 claim survives summary judgment

After several rounds of motion practice and amended pleadings, JPMorgan ended up as the lone defendant at the close of discovery. JPMorgan filed a motion for summary judgment. Judge Boyle granted summary judgment to JPMorgan on certain claims, but denied summary judgment as to the 75-1.1 claim.

Significantly, Judge Boyle found that the bank did not have a contractual obligation to modify the loans.  Judge Boyle opined that there cannot be a 75-1.1 claim based on a failure to modify a loan or contract if the lender has no obligation to make the modification.

The court allowed the 75-1.1 claim to go forward, however, based on JPMorgan’s alleged promises that the borrower would receive a loan modification. Judge Boyle indicated that there was “just enough” evidence to allow the 75-1.1 claim to make it to the jury.

Although it is notable that the court here allowed the 75-1.1 claim to survive, this case presents a slightly different fact pattern than in other cases. The borrower here was able to raise a genuine issue of material fact that JPMorgan was responsible for the borrower being unable to refinance or modify the loans in the first place. In allowing the borrower’s negligence claim to also survive summary judgment, Judge Boyle determined that the lender’s alleged misapplication of the loan proceeds could give rise to a duty of care that the lender would not otherwise owe to the borrower.

It also does not appear that the parties briefed whether the borrower had actually or reasonably relied on any statement by the bank. As we have pointed out in previous posts, the North Carolina Supreme Court has held that both actual and reasonable reliance are necessary if a 75-1.1 claim is premised on misrepresentations.

In Hetzel, the court found that the lender may have owed a duty to the borrower that would not normally arise in the debtor/creditor context. It will be left to other courts to explore the significance of that special duty on a lender’s liability under 75-1.1—the parties in Hetzel settled at mediation before trial.

Author: George Sanderson