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

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