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June 26, 2018 in 75-1.1 Exemptions by

Concealment, Deletions, and Diversions—Oh, My! But Not Substantially Aggravating.

Courts frequently encounter a section 75-1.1 claim in the context of a contract. We have written before about the difficult determination of whether the allegations rise to the level of a “substantial aggravating factor” that would support a section 75-1.1 claim despite the contract (examples here, here, and here).

Earlier this month, United States District Judge Graham C. Mullen of the Western District of North Carolina faced this question. Caruthers v. Vitex, Inc. involved the breakdown of a relationship between a company and its independent contractor. Judge Mullen was tasked with determining whether the contactor’s conduct rose to the level of a substantial aggravating factor sufficient to support a section 75-1.1 claim in the face of the parties’ contract.

Despite allegations that the contractor had diverted business, concealed a conflict of interest, and deleted his emails under suspicious circumstances, Judge Mullen ultimately dismissed the claim. He found that the contractor’s conduct did not rise to the level of a substantial aggravating factor.

Caruthers Signs on to Be Vitex’s Independent Contractor for Sales

Vitex, Inc. provides consulting services to the financial services industry. Its customers rely on Vitex for assistance in evaluating their computer operations and directing them to the proper software for their needs.

In January 2014, Thomas Caruthers agreed to be an independent contractor for Vitex. They signed a master services agreement by which Caruthers would pursue potential new business for the company. For any new business, Caruthers’s role could involve generating leads, preparing proposals, or finalizing the actual sales.

In turn, Caruthers would be eligible for a commission. Because of the breadth of his role, his potential commission was up to 15% of the total sale (depending on what services he performed in actually reeling in the new business).

Things apparently went well for several years, but in mid-2016, the arrangement fell apart.

Be Careful What You Wish For

In June 2017, Caruthers sued Vitex for unpaid commissions. He claimed that he had closed two sales and Vitex failed to pay him any commissions for those sales. He also alleged that Vitex had unilaterally terminated his arrangement with the company.

Apparently, there was more to the story.

Vitex counterclaimed for breach of contract and unfair and deceptive trade practices. Vitex alleged that it was Caruthers, not Vitex, that cancelled the contract. Further, Vitex alleged that Caruthers had become an officer of a Vitex competitor and began diverting Vitex business to the other company.

According to Vitex:

  • Caruthers had been attending industry conferences on Vitex’s dime, but then diverting the leads and potential sales from the conferences to the competitor.
  • Caruthers forwarded Vitex’s confidential information—including Vitex’s customer proposals—to his personal email account.
  • Caruthers had attempted to cover his tracks by deleting his emails from the Vitex servers.
  • He refused to return his company phone or computer.

Caruthers moved to dismiss the counterclaims, including the section 75-1.1 claim.

Despite the Aggravation, There Were No Aggravating Factors

Judge Mullen first addressed the breach of contract claim. Vitex’s allegations that Caruthers failed to return the company’s equipment were sufficient to state a claim for breach of contact. Caruthers had also challenged the sufficiency of the other contact allegations—namely, whether Caruthers’s attempts to benefit a competitor stated a claim for breach of contract. Having found that one of Vitex’s contact theories viable, Judge Mullen did not need to consider the other potential contract theories of recovery.

Turning to the section 75-1.1 claim, Judge Mullen noted that Vitex would need to show a substantial aggravating circumstance in light of the parties’ agreement.

Vitex tried several different angles to make an aggravating circumstance.

First, Vitex pointed to the anticompetitive elements of Caruthers’s activities. But Judge Mullen found that Caruthers’s diversion of company leads was not a sufficient aggravating factor. Likewise, Caruthers’s alleged concealment from Vitex of his communications with company prospects was not enough to create section 75-1.1 liability.

Vitex also relied on Caruthers’s email deletions. We have previously discussed the North Carolina Business Court’s decision in Post v. Avita Drugs that forecast the potential of an aggravating factor through “forging and destroying documents.” But Carruthers’s email destruction here did not rise to the level of an aggravating factor.

Finally, Vitex pointed to Caruthers’s failure to disclose his relationship with the Vitex competitor. Again, Judge Mullen found that concealment was not enough to create an aggravating factor.

Ultimately, each of Vitex’s allegations supporting its section 75-1.1 claim arose out of the same facts as the breach of contract claim. The alleged aggravating factors all related to Caruthers’s obligations under the parties’ contractual arrangement. Without more, Vitex could only bring a breach of contract claim and the section 75-1.1 claim was dismissed.

Looking Ahead

Judge Mullen’s decision follows the long line of cases that have created an uphill battle for a would-be section 75-1.1 plaintiff in the face of a contract. Given some of the allegations—particularly those of concealment, diversion, and email deletion—the decision may be welcomed by the defense bar after some Business Court decisions that suggested some potential pathways to allege a substantial aggravating factor (such as the one we discussed here).

Author: Jeremy Falcone