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Choice of Law in Unfair-Trade-Practices Cases

Ellis Winters

Ellis & Winters

Can a contractual choice of law disable N.C. Gen. Stat. § 75-1.1? Yes, according to a recent decision from a federal court in New York.

In Canon U.S.A., Inc. v. Cavin’s Business Solutions, Inc., a business filed a 75-1.1 claim against a North Carolina defendant. The claim centered on a business contract—a contract that stipulated that it was governed by New York law. Under New York law on unfair trade practices, the plaintiff’s proposed claim would fail.

Those points required the court to ask whether applying New York law would violate a fundamental public policy of North Carolina. The court answered no.

New York, New York

The Canon decision arises from lawsuits that Canon filed against four dealers of Canon products. One of the dealers, Cavin’s Business Solutions, has its headquarters in North Carolina.

Canon filed the lawsuits in the U.S. District Court for the Eastern District of New York. The court consolidated the cases, because they all involved a standard agreement between Canon and its dealers.

The dealer agreements all contain the same choice-of-law clause. It says that the agreements “shall be governed by and construed in accordance with the laws of the state of New York.”

In the lawsuits, Canon claimed that the dealers submitted false documents to Canon and reaped financial benefits by doing so. Canon sued to recoup those benefits and to recover additional damages.

Canon pursued three claims against the dealers: breach of contract, fraud, and unfair trade practices. Canon asserted its unfair-trade-practices claims under the laws of North Carolina, Nevada, and Florida—the states in which the dealers have their headquarters.

The dealers filed motions to dismiss. They argued that the choice-of-law clause in the dealer agreements barred Canon from asserting unfair-trade-practices claims under North Carolina, Nevada, and Florida law. Any claim of that nature, they argued, had to be pursued under New York law. That law, as interpreted by the New York courts, limits private unfair-trade-practices claims to consumers alone. Canon, obviously, is not a consumer.

In response to the motions to dismiss, Canon argued that applying the New York choice-of-law clause would violate a fundamental public policy of North Carolina, Nevada, and Florida—a policy reflected in each state’s unfair-trade-practices statute. Canon argued that choice-of-law principles reject contractual choices of law that violate fundamental public policies.

When Is a Public Policy “Fundamental”?

Under New York’s conflict-of-laws regime, a contractual choice of law will not be enforced if application of the chosen law would violate a fundamental public policy of the jurisdiction whose law would otherwise apply. (The same is true under North Carolina’s choice-of-law regime.)

In Canon, District Judge Joseph F. Bianco put the onus on Canon to show why the public policies of North Carolina, Nevada, and Florida that prohibit fraudulent commercial conduct were fundamental enough to overcome the choice-of-law clause in the dealer agreements.

The court decided that Canon did not make this showing. In particular, Canon didn’t identify any authority from North Carolina, Nevada, or Florida that calls the enforcement of these states’ unfair-trade-practices statutes fundamental. These statutes are “significan[t],” the court explained, but that does not necessarily mean that they embody a fundamental public policy. (Unfortunately, the court did not explain what characteristics might make a public policy fundamental, rather than just significant.)

The court also saw no reason why North Carolina, Nevada, and Florida have materially greater interests in this dispute than New York has. New York, after all, has its own statute and case law on unfair trade practices. The fact that New York law is narrower than the laws of North Carolina, Nevada, and Florida does not mean that New York’s interest is somehow less important than the interests of the other three states.

The court rounded out its analysis by citing a New York decision, Finucane v. Interior Construction Corp. In Finucane, the court enforced an Oklahoma choice-of-law clause even though Oklahoma law on indemnification—the issue in that case—was more permissive than New York law on indemnification. According to the Canon court, Finucane shows that the mere fact that one state’s law is different does not mean that the different law offends the public policy of another state.

In Canon, then, the mere fact that New York law differed from North Carolina, Nevada, and Florida law on unfair trade practices did not automatically mean that applying New York law would offend fundamental public policies.

Lessons for 75-1.1 Claims Based on Contracts with Choice-of-Law Provisions

Canon is an important case for business litigators in North Carolina.

Complex business litigation, after all, often concerns business contracts.  Many—if not most—business contracts have choice-of-law clauses. Canon shows that these clauses can limit the ability to seek treble damages. This is true even if a section 75-1.1 claim is based on conduct in North Carolina.

Canon is important for another reason as well: it underscores the point that a mere difference in law across jurisdictions does not mean that applying one jurisdiction’s law offends the public policy of the second jurisdiction.

Given the number of complex business cases that turn on interstate fact patterns, Canon reminds us that arguing for the application of one state’s law might require a deep dive into the public policies of a different state.

Author: Stephen Feldman

November 22, 2016
Posted in  Choice of Law