Businesses regularly make decisions based on forecasts of future market opportunities.

When a business makes a bad guess, however, can N.C. Gen. Stat. § 75-1.1 come to its aid? What if the guess turned on statements by a contracting partner?

Today’s post looks at a recent decision about these questions. As the decision reveals, section 75-1.1 sets a high bar for claims that appear to rest—as Naked Eyes might say—on promises, promises.

It’s Showtime

The facts in Topshelf Management v. Campbell-Ewald (a case we have covered before) concern flying simulators that the U.S. Navy uses in recruiting events.

The defendant, Campbell-Ewald, did marketing for the Navy. The Navy would issue a statement of work to Campbell-Ewald that sought specific services. Campbell-Ewald then gave pricing information to the Navy, and the Navy would issue a task order for the services. After it received a task order, Campbell-Ewald would issue a corresponding purchase order to a subcontractor.

In September 2008, Campbell-Ewald considered using Showtime Sports and Marketing as a subcontractor for the simulators. Showtime signed terms and conditions that would govern each purchase order from Campbell-Ewald. The terms said that no work by Showtime would be authorized before Campbell-Ewald issued a purchase order.

Campbell-Ewald soon issued a purchase order to Showtime to supply two simulators. Then, in mid-2010, Campbell-Ewald decided to subcontract work for a third simulator to Showtime, even though Campbell-Ewald had considered supplying the simulator itself.

Before it issued the purchase order for the third simulator, however, Campbell-Ewald received a letter from Showtime’s principal, Brian Efird. The letter said that Showtime was winding up its operations, but that Efird would soon associate with a new company, called Topshelf, which could contract with Campbell-Ewald.

This letter changed the calculus for Campbell-Ewald; it decided to do the work on the third simulator itself. Though disappointed about not getting the purchase order for the third simulator, Efird (through Topshelf) continued to supply Campbell-Ewald with the first and second simulators.

That work didn’t last. In December 2011, Campbell-Ewald told Efird that the Navy had discontinued the first two simulators, and that Topshelf’s work would end in January 2012.

Topshelf sued. Its complaint had tort and contract claims, but only its section 75-1.1 claim survived a motion to dismiss. Campbell-Ewald later moved for summary judgment.

When Misrepresentations and Contract Terms Collide

Topshelf’s 75-1.1 claim had two parts.

First, it claimed that Campbell-Ewald misled Topshelf about the third simulator. In particular, Topshelf thought that Campbell-Ewald, through its statements, had assured the issuance of a purchase order for the third simulator.

Second, Topshelf accused Campbell-Ewald of making a series of representations that led Topshelf to believe that more purchase orders were coming. Relying on these representations, Topshelf spent money updating the first two simulators—only to have its work on those simulators discontinued.

U.S. District Court Judge Thomas D. Schroeder didn’t buy either argument.

As for the third simulator, Judge Schroeder emphasized that Campbell-Ewald simply changed its mind about the purchase order when it learned of Showtime’s dissolution. He then explained that, on these facts, Campbell-Ewald’s evaluation of the pros and cons of using Topshelf did not violate section 75-1.1. Showtime’s dissolution, after all, was a significant event, and Campbell-Ewald’s change of heart reflected a rational business response.

The parties’ contract confirmed this reasoning. The terms that Showtime signed at the outset of the parties’ relationship said that no work could be assigned without Campbell-Ewald issuing a purchase order. Campbell-Ewald never issued a purchase order for the third simulator.

Topshelf’s second theory fared no better. That theory, like the first theory, clashed with the fundamental structure of the parties’ dealings: the companies worked under short-term purchase orders. Campbell-Ewald, moreover, issued purchase orders only based on the Navy’s needs. Given that the parties’ contract memorialized this structure Topshelf could not claim to have been misled about future expectations of work.

Top Lessons from Topshelf

Topshelf serves as yet another reminder that, when two parties have a business relationship governed by a contract, the starting point to analyze their conduct under section 75-1.1 is that contract. Here, that contract made clear that a purchase order was a prerequisite to any subcontractor work on a simulator. The plaintiff here couldn’t overcome that factual hurdle.

But was the hurdle insurmountable?

Imagine, for example, if Campbell-Ewald had told Topshelf that, notwithstanding the terms of the contract, Topshelf could be guaranteed work on the third simulator. If an executive at Campbell-Ewald made that statement to an executive at Topshelf, would Topshelf have acted reasonably had it relied on that statement? One can imagine a battle of facts regarding reasonableness—including whether the contract language would defeat any “guarantee” of future work, regardless of the specific words used to make the guarantee.

In any event, the analysis would likely start with, and revolve around, the role of the parties’ contract. That contract can leave a plaintiff, like Topshelf here, with empty promises.

Author: Stephen Feldman