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Claims for Deceptive Practices Must Now Be Alleged in Detail (at Least in Federal Court)

Ellis Winters

Ellis & Winters

A federal court in North Carolina has held that certain claims under N.C. Gen. Stat. § 75-1.1 require especially detailed allegations. This groundbreaking decision will have major consequences for plaintiffs who pursue 75-1.1 claims in federal court—and for defendants who move to dismiss those claims.

Last week, in Topshelf Management, Inc. v. Campbell-Ewald Co., the U.S. District Court for the Middle District of North Carolina (namely, Judge Schroeder) held that parties who allege deceptive practices under section 75-1.1 must allege those claims with particularity. The court reached this conclusion by applying Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) requires certain disfavored claims—most notably, fraud claims—to be pleaded with particularity.

Topshelf explicitly diverges from a 2005 Middle District decision on the same issue. In CBP Resources, Inc. v. SGS Control Services, Inc., the court (the late Judge Osteen, Sr.) had held that “[u]nlike fraud, claims of unfair and deceptive trade practices . . . are not among the historically disfavored actions” that Rule 9(b) covers.

Unsurprisingly, when Judge Schroeder turned away from CBP, he fully explained his reasons for doing so. Indeed, the Topshelf opinion is so thorough that it’s hard to do it justice here.

Three of the court’s reasons for applying Rule 9(b) to section 75-1.1 claims deserve highlighting.

  • First, the court explained, 75-1.1 claims raise the same policy concerns that fraud claims do. The Topshelf court rejected the CBP court’s statement that 75-1.1 violations “do not carry the same stigma of moral turpitude or damage to reputation that is associated with fraud.” To reach this conclusion, the Topshelf court quoted the usual list of adjectives that define a 75-1.1 claim: “A practice is unfair when it offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers, and a practice is deceptive if it has the capacity or tendency to deceive.” Given the disapproval implied by these terms, the Topshelf court wrote, “the same reputational concern is equally implicated by claims of fraud and section 75-1.1 violations.”
  • Second, a deception claim under section 75-1.1 is closely related to a fraud claim. After all, as the court expressly noted, fraud is a per se violation of section 75-1.1.
  • Third, the elements of a deception claim under section 75-1.1 are now much closer to the elements of fraud than they were at the time of CBP. Two years ago, in Bumpers, the North Carolina Supreme Court held that a deception claim requires a plaintiff to prove actual reliance on the statements at issue, as well as the reasonableness of that reliance. These two requirements overlap with the elements of fraud. At the time of CBP, in contrast, there was a modest split of authority on whether section 75-1.1 claims require actual reliance. Likewise, the element of reasonable reliance under section 75-1.1 arose for the first time in Bumpers. In sum, the Topshelf court decided that CBP had “been undermined by intervening case law.”

For these reasons and others, Topshelf holds that “Rule 9(b) applies to section 75-1.1 claims alleging detrimental reliance on false or deceptive representations.” As far as we can tell, Topshelf is the first 75-1.1 decision to reach this conclusion—either under Federal Rule 9(b) or under the parallel North Carolina Rule 9(b).

And Topshelf is not limited to 75-1.1 claims. The court also decided that Rule 9(b) applies to claims for negligent misrepresentation. On this issue, the court decided not to follow the majority’s reasoning in an unpublished Fourth Circuit decision. Instead, the court followed Judge Wilkinson’s dissenting opinion in that case. The Fourth Circuit’s decision was unpublished, and it involved a negligent-misrepresentation claim under Maryland law, so Judge Schroeder was within his rights not to follow it. Even so, the Topshelf opinion shows rare analytical confidence.

Thus, the Middle District has now held that deception claims under section 75-1.1, as well as negligent-misrepresentation claims under North Carolina law, all need to be alleged with particularity. That requirement demands that parties allege at least “the who, what, when, where, and how” of the misstatements at issue.

Will Topshelf add momentum to motions to dismiss 75-1.1 claims? Will the North Carolina state courts follow the decision? We welcome your comments.

Author: Matt Sawchak

August 11, 2015
Posted in  Misrepresentations