Further Closing the Narrow Opening for Section 75-1.1 in the Employer-Employee Context
Ellis & Winters
A recent opinion from the North Carolina Business Court illustrates courts’ continued reluctance to allow section 75-1.1 claims in the context of an employer-employee relationship. Judge James L. Gale recently dismissed a N.C. Gen. Stat. § 75-1.1 claim that arose from an employment relationship that had evolved into a business partner and buyer-seller relationship.
In Urquhart v. Trenkelbach, Judge Gale accepted the defendants’ contention that their actions all involved the internal operations of the company, and thus were not “in or affecting commerce.”
Just When I Thought I Was Out, They Pulled Me Back In
In 2007, Curtis L. Trenkelbach recruited Christopher J. Urquhart to work for Trenkelbach’s commercial construction company.
Trenkelbach was the sole owner of the company. He apparently wanted an exit strategy, and he saw a potential successor in Urquhart. The two orally agreed to a succession plan through Urquhart’s gradual purchase of Trenkelbach’s shares.
To facilitate the succession, Trenkelbach and Urquhart formed a new LLC. The members of the LLC included Trenkelbach, Urquhart, and a separate corporation formed to allow Urquhart to increase his ownership interest in the company.
As part of the formation of the LLC, Trenkelbach and Urquhart executed several agreements. The operating agreement required cause before a manager could be removed. Likewise, Urquhart’s employment agreement restricted termination to situations where there was cause.
Initially, things went well.
The business flourished, and Trenkelbach’s faith in Urquhart proved warranted. Over five years, the company’s revenues quadrupled. The tremendous success also accelerated Urquhart’s succession to ownership, which was tied to company performance.
The success may have also caused Trenkelbach to reconsider his departure.
Urquhart alleged that Trenkelbach orchestrated a scheme to force Urquhart’s ouster by manufacturing cause for termination, removing him as a manager, terminating his employment, and exercising a provision that allowed Trenkelbach to repurchase Urquhart’s ownership interest in the company.
The Alexander v. Alexander Exceptions Remain Narrow
Urquhart brought a dozen claims against Trenkelbach, including the section 75-1.1 claim.
He premised the section 75-1.1 claim on allegations that Trenkelbach forced him out of management, attempted to manipulate the succession agreement, terminated Urquhart’s employment, and wrongfully diverted company funds.
Trenkelbach moved to dismiss. He argued that the conduct took place solely within the confines of the company, so the conduct was not “in or affecting commerce.”
Judge Gale first reviewed the landscape of section 75-1.1 cases involving employer and employee.
He relied on the reasoning of the Court of Appeals in its 2016 decision in Alexander v. Alexander. In that case, the Court of Appeals determined that a section 75-1.1 claim could lie—even in an employer-employee context—if the claims involved outside businesses, distinct corporate entities, or the interruption of a commercial relationship between two market participants.
From these facts, Urquhart’s claim might appear to fit within one of these exceptions, given that the dispute involved two separate corporate entities (albeit entities formed for a related purpose). Urquhart had his own, separate company created to purchase shares of the primary company.
However, Judge Gale did not find that Trenkelbach’s conduct met any of the Alexander exceptions. Instead the facts more closely resembled cases that declined to allow a section 75-1.1 claim:
- Urquhart’s termination involved conduct internal to the company.
- Any diversion of company funds was an internal issue and not affecting commerce.
- Finally, any actions relating to the succession plan related only to an internal agreement between managing members of the company. Therefore, any violation of that agreement also occurred internally, within the confines of a company.
Having determined that no conduct occurred outside the internal dealings of the company, Judge Gale dismissed the claim.
As an alternative ground for dismissal, Trenkelbach had argued that the conduct underlying the section 75-1.1 claim arose out of the breach of a contract. Having determined that the conduct was not in or affecting commerce, Judge Gale did not reach this issue.
The Uphill Battle for Any Section 75-1.1 Claim Involving an Employer-Employee Relationship
Even with good ammunition—including the sale of a company and separate corporate entities—Urquhart could not plead a section 75-1.1 claim.
Would-be section 75-1.1 plaintiffs in the employment context need a hook outside the internal company dynamics to try and wedge the claim into the narrow exceptions spelled out in Alexander. In Trenkelbach, one potential possibility might be the activities of the other companies—did any have some external purpose, not solely tied to the purchase of ownership in Trenkelbach’s company? Any external purpose might have given the plaintiff that extra hook.
Absent that type of pleading, these types of claims will continue to be dismissed.
Author: Jeremy Falcone