Breach of Contract and Section 75-1.1: The Beginning
Ellis & Winters
A breach of contract alone does not violate N.C. Gen. Stat. § 75-1.1. If a breach is accompanied by “substantial aggravating circumstances,” however, the breach does violate section 75-1.1—and the plaintiff’s contract damages are multiplied by three.
Despite these high stakes, courts have given almost no explicit guidance on what counts as substantial aggravating circumstances. Most decisions state only a conclusion on whether particular facts amount to substantial aggravating circumstances. To seek a better understanding of the law in this area, I looked back to see which court used the term first, and in what setting.
The first published decision to discuss aggravating circumstances in a 75-1.1 case came from the Fourth Circuit. That 1981 decision was United Roasters v. Colgate-Palmolive. Eight years later, in Bartolomeo v. S.B. Thomas, Inc., the Fourth Circuit issued another key early opinion on “substantial aggravating circumstances.”
When North Carolina state courts discuss substantial aggravating circumstances, they often cite United Roasters or Bartolomeo. Even when they don’t cite those decisions, moreover, they usually cite their descendants.
What, then, do United Roasters and Bartolomeo tell us about the meaning of substantial aggravating circumstances?
United Roasters: An “Ordinary” Breach Is Neither Unfair Nor Deceptive
In 1973, United Roasters made a contract with Colgate, giving Colgate the right to manufacture and distribute a roasted soybean snack called Bambeanos. The contract had a fixed term, but it allowed Colgate to terminate the contract before the end of the term.
Before the term ended, Colgate decided to stop manufacturing and selling Bambeanos. Colgate made this decision in January 1976, but it waited until July 1976 to tell United Roasters. According to United Roasters, the contract impliedly obligated Colgate to exercise its termination rights in good faith. United Roasters sued Colgate, alleging a breach of contract and violations of section 75-1.1.
A federal jury sided with United Roasters. The jury found that Colgate’s failure to tell United Roasters about the termination decision violated the 1973 contract. Whether these facts violated section 75-1.1, however, was an issue of law for the court to decide. The federal district judge concluded that Colgate’s breach was neither unfair nor deceptive.
On appeal, the Fourth Circuit affirmed the breach-of-contract judgment on different grounds. The court decided that Colgate violated the contract not by keeping its termination decision secret for six months, but by failing to perform the contract in good faith before the termination.
The Fourth Circuit then addressed whether the contract breach (the one that the court had just recognized) violated section 75-1.1. According to the Fourth Circuit, an intentional breach of a contract—even an undisclosed breach—shows no more than the type of unfairness that “inheres in every breach of contract when one of the contracting parties is denied the advantage for which he contracted.” The Fourth Circuit rejected this possible form of unfairness as “nothing more than an ordinary contract breach.”
The court went on to say that if an award for a breach of contract “is to be trebled, the North Carolina legislature must have intended that substantial aggravating circumstances be present.”
The Fourth Circuit then tried to give some definition to aggravating circumstances. It pointed to the North Carolina Supreme Court’s decision in State ex rel. Edmisten v. J.C. Penney Co. That 1977 decision listed several practices as illustrations of what section 75-1.1 prohibits. The practices listed in J.C. Penney, the Fourth Circuit observed, “are actually deceptive or approach deception.”
The court then evaluated the jury’s findings in United Roasters. As the court noted, the jury did not conclude that Colgate acted deceptively when it breached its agreement. Thus, although Colgate’s breach “was intentional and not promptly disclosed,” it was no worse than “ordinary.”
Bartolomeo: Substantial Aggravating Circumstances Probably Require Deception
Eight years later in Bartolomeo, the Fourth Circuit again addressed the standard for turning a contract breach into a 75-1.1 violation.
The plaintiff, Tim Bartolomeo, did business as Quality Brands, Inc. In 1983, Quality Brands made an oral agreement with S.B. Thomas, Inc., to distribute Thomas’ Original English Muffins. (What is it about 75-1.1 and food?)
In 1987, S.B. Thomas terminated the distribution agreement. The termination came after repeated assurances from a Thomas affiliate that Bartolomeo’s business would continue. Bartolomeo sued Thomas for breach of contract and violations of section 75-1.1.
Thomas moved for summary judgment. In response, Bartolomeo argued that there were genuine issues of material fact on whether Thomas misled him into thinking his distributorship would continue. The Fourth Circuit, however, reiterated United Roasters: It held that, to prove a 75-1.1 violation based on a contract breach, “a plaintiff must show substantial aggravating circumstances attending the breach.”
The Fourth Circuit acknowledged that Bartolomeo had listed seven different acts by Thomas (in addition to the assurances) that allegedly showed a 75-1.1 violation. These acts included tampering with documents, delaying reimbursements, and not telling Bartolomeo about incentive bonuses. The Fourth Circuit, however, concluded that these acts were, “at most, simple breaches of contract.”
More importantly, the Fourth Circuit used the Bartolomeo opinion as a platform to summarize its holding in United Roasters. The court said that, to show a 75-1.1 violation under United Roasters, “one would probably need to demonstrate deception either in the formation of the contract or in the circumstances of the breach.”
In the end, do United Roasters and Bartolomeo shed any light on the meaning of substantial aggravating circumstances?
Read together, these cases arguably hold that a 75-1.1 violation based on substantial aggravating circumstances requires a showing of deceptive conduct. Even if this is right, however, important questions remain.
First, how does a “substantial aggravating circumstances” claim based on deception differ from any other misrepresentation-based 75-1.1 claim? Presumably, the deceptive-breach claim would still require proof of a misrepresentation and reliance on that misrepresentation. The Bartolomeo court essentially made this point. It wrote that, even if Thomas gave false assurances to Bartolomeo for months, Bartolomeo did not show that he suffered actual injury as a proximate result of any statements by Thomas.
Second, United Roasters and Bartolomeo do not expressly decide whether a breach of contract can be unfair (that is, unfair beyond the level of unfairness that applies to every breach of contract). Assuming that an unfair breach—however it might be defined—does violate section 75-1.1, what would distinguish an unfair-breach claim from a direct unfairness claim?
Finally, imagine a contract breach in which the defendant did not intend to deceive, but the defendant’s conduct still qualified as deceptive or unfair. Could this claim survive the economic-loss rule? If the claim were considered negligence-based, for example, the economic-loss rule would probably bar it. This same fact pattern arose in a 2013 decision of a federal bankruptcy court, but the court declined to rule on the economic-loss issue at the Rule 12 stage. The court perceived—arguably correctly—that the North Carolina courts had not yet settled that issue of law.
Future decisions might well clarify these issues. Until then, parties and lawyers can use United Roasters and Bartolomeo as a foundation for arguments on contract-based 75-1.1 claims.
In future posts, we’ll comment on the patterns that emerge in more recent “substantial aggravating circumstances” decisions.
Author: Stephen Feldman