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

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