For Section 75-1.1, the Dividing Line between Contract and Non-Contract Claims Can Be Fuzzy
Ellis & Winters
Today, we look at another decision about the line that divides ordinary contract claims from claims that allege “substantial aggravating circumstances” relating to a breach. The latter category of claims violate N.C. Gen. Stat. § 75-1.1. (Speaking of which, I recently presented a CLE on this topic; here is a link to the manuscript.)
The case is Swift Beef Co. v. Alex Lee Inc., authored by U.S. District Judge Max Cogburn.
Where’s the beef?
Swift Beef and Alex Lee were parties to two contracts. The first contract was a lease: Swift—a meat processor—leased a facility in Lenoir, North Carolina, from Alex Lee. In the second contract, Swift sold its products to Alex Lee, which owns a grocery distributor and a supermarket chain (Lowes Foods).
The parties’ relationship eventually went south. Swift sued Alex Lee, alleging that Alex Lee was terminating the agreements without cause.
Alex Lee then filed counterclaims, alleging—among other things—that Swift duped Alex Lee by passing along labor costs that should have been allocated to other buyers (including Food Lion). Swift allegedly didn’t have proper equipment to meet its commitments to Food Lion, and Swift’s products were priced too low for its relationship with Food Lion to be profitable. Swift’s employees were therefore instructed to falsify labor records and not charge Food Lion for its share of shipping or labor costs. Swift instead passed these costs to Alex Lee—and didn’t disclose that fact to Alex Lee.
Alex Lee countersued on these facts for both breach of contract and violation of section 75-1.1.
Unsurprisingly, Swift moved to dismiss the 75-1.1 counterclaim based on a familiar refrain: alleged breaches of contract, even if intentional, do not violate section 75-1.1.
Alex Lee characterized that argument as baloney. It argued that Swift concealed its conduct from Alex Lee, and that this deceptive conduct satisfied the “substantial aggravating circumstances” standard.
Distinguishing between 75-1.1 muscle and gristle
Judge Cogburn agreed that most of Alex Lee’s allegations in the counterclaims were based on the parties’ agreements. Those allegations could not make out a 75-1.1 claim because they didn’t constitute substantial aggravating circumstances.
The allegations about the labor costs, however, were “more troubling.”
Those allegations, Judge Cogburn explained, sufficiently described fraudulent conduct. Elaborating further, Judge Cogburn wrote that the fraud didn’t concern the formation of the agreements or Swift’s failure to perform. Put another way, Judge Cogburn did not perceive the fraud allegations to be predicated on any contract breach, but instead on independent fraudulent conduct.
Alex Lee is now free to pursue treble damages based on its allegations about Swift’s labor-cost misallocation. In that pursuit, however, Alex Lee will need to make some decisions about how it frames its 75-1.1 claim.
In its counterclaims and Rule 12 briefing, Alex Lee pursued a substantial-aggravating-circumstances theory. Alex Lee argued that deception in a contract breach is sufficiently aggravating to yield 75-1.1 liability. As a recent Business Court decision emphasizes, however, it “is far more difficult to allege and prove egregious circumstances after the formation of the contract.” As the Post decision explains, that showing might require not only concealment, but also acts to deter further investigation.
Judge Cogburn’s analysis might offer Alex Lee three additional 75-1.1 theories. This is because Judge Cogburn concluded that the 75-1.1 claim “does not appear to be predicated on [Swift’s] performance under the Agreements or a breach thereof.” Alex Lee could seize on this analysis to shift its 75-1.1 theory:
- Alex Lee could frame the 75-1.1 claim as a per se violation, derivative of Alex Lee’s common-law fraud claim.
- The claim could be framed as a misrepresentation-based claim. Alex Lee would need to show actual and reasonable reliance, but not any intent to deceive.
- If the above theories prove unworkable, Alex Lee might characterize the misallocation of labor costs as simply unfair. Direct-unfairness claims, after all, can be difficult to defend because of section 75-1.1’s open-textured conduct standard.
In view of these dynamics, Swift might want to identify which of these theories will be most difficult for Alex Lee to prove, and then frame Alex Lee’s arguments and evidence within that theory. And if Alex Lee flip-flops its theories, Swift can use that change as at least atmospheric evidence of the claim’s weakness.
As these points show, Swift Beef is another meaty example of why an understanding of the taxonomy of 75-1.1 claims can increase a litigator’s tactical options.
Author: Stephen Feldman