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January 13, 2015 in 75-1.1 Exemptions by

Amended Complaints and Industry Standards

When one of my children misbehaves, I often hear a variation on this response: “But [sibling] does the same thing! And so do [named friends]!”

Can a party who is accused of an unfair trade practice raise the same defense? That is, can a business avoid section 75-1.1 liability by proving that the plaintiff business engages in the same allegedly unfair conduct?

The answer, according to a recent North Carolina Business Court decision, is no. In that case, Le Bleu Corp. v. B. Kelley Enterprises, Chief Judge Gale refused to allow the defendants to take discovery from the plaintiffs for the purpose of establishing industry standards.

The same case also featured a fight over a Business Court designation. The fight arose when the plaintiffs filed an amended complaint one year into the litigation. The defendants filed a notice of designation based on that amended complaint.

This post analyzes both aspects of the Le Bleu case.

A Skirmish over a Business Court Designation

The plaintiffs in Le Bleu manufacture and sell bottled water. The defendants, under the name Blue Caffé, supply in-house water filtration systems to North Carolina businesses.

The plaintiffs alleged that Blue Caffé and its employees improperly tried to attract Le Bleu customers. The alleged misconduct included misrepresentations about the cleanliness of Le Bleu’s water bottles. Le Bleu’s complaint contained, among other claims, a claim for violation of section 75-1.1.

The case was litigated for about a year in Forsyth County Superior Court. In June 2014, however, the plaintiffs filed an amended complaint that added a claim for trade-secret misappropriation, as well as an additional defendant.

The defendants, including the new defendant, then used the amended complaint as a basis to move the case to the North Carolina Business Court. The defendants said that the amended complaint raised issues of trade-secret misappropriation. They also said that trade-secret cases fall within the “state trademark or unfair competition law” category in the pre-2014 version of N.C. Gen. Stat. § 7A-45.4(a)(4).

The plaintiffs opposed the move. They argued, with some force, that the defendants were trying to delay the trial date. The plaintiffs cited Business Court Rule 3.1(d), which says that a notice of designation cannot be used to delay ongoing or upcoming proceedings.

Then-Chief Judge Jolly sided with the defendants. His order held, without discussion, that cases that involve material issues related to trade secrets satisfy section 7A-45.4(a). He also said that whether or not the original defendants had a right to file a notice of designation, the new defendant clearly had the right to do so.

The takeaway message: Be aware that amendments to a complaint could give your opponent a new opportunity for a Business Court designation—an opportunity that wouldn’t otherwise exist.

Industry Standards and Section 75-1.1

When they arrived in the Business Court, the parties brought with them an intriguing discovery dispute.

The dispute involved a notice of a Rule 30(b)(6) deposition. That notice included three topics on the plaintiffs’ business practices. The plaintiffs resisted. What, they asked, did their own conduct have to do with the claims against the defendants?

The defendants made it as clear as spring water why they wanted this discovery. They wanted to show that their own allegedly unfair conduct was par for the course in this industry. They wanted to prove this point by showing that the plaintiffs engaged in this same conduct.

Each side cited what it considered to be favorable North Carolina appellate decisions. Chief Judge Gale summarized these decisions as saying that industry standards can show whether a party’s conduct meets ethical or commercial standards, but industry standards are not dispositive on whether an act is unfair or deceptive.

Chief Judge Gale then turned to two decisions that are more on point.

First, in Winston Realty Co. v. G.H.G. Inc., the North Carolina Supreme Court held that a defendant’s own conduct is of “sole relevance” on whether that defendant violated section 75-1.1. On that basis, the Winston Realty court held that contributory negligence is no defense to a 75-1.1 claim.

Second, in Media Network, Inc. v. Long Haymes Carr, Inc., the North Carolina Court of Appeals extended the reasoning of Winston Realty. The Court of Appeals held that a defendant could not defend against its liability by introducing evidence of a plaintiff’s unfair practices (as opposed to contributory negligence) either.

As Chief Judge Gale explained, Winston Realty and Media Network show that a defendant cannot avoid section 75-1.1 liability simply because others in the industry engaged in the same practices. As a result, the Business Court barred most discovery under the 30(b)(6) topics at issue.

A Caution Flag for Discovery

The Le Bleu decision affects discovery strategy and tactics in 75-1.1 cases.

If you or your client is charged with violating section 75-1.1, you might be inclined to counterattack through discovery. That counterattack might include burdensome requests that require your adversary to turn over sensitive internal records. It might also include third-party discovery to your adversary’s customers or allies.

As Le Bleu shows, however, this type of rhubarb might be an unwise investment.

Author: Stephen Feldman