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Consumer Fraud, Unfair Trade Practices, and Internet Purchases

Ellis Winters

Ellis & Winters

If you buy a product through a website, and then the product doesn’t live up to its promises, can you sue the manufacturer for violating N.C. Gen. Stat. § 75-1.1?

A recent decision by the federal court in Boston highlights at least three important points that affect the answer.

A Laptop Battery That Can Last Nine Hours?

Orlando Medeiros bought a Yoga 2 laptop manufactured by Lenovo. Medeiros lives in Massachusetts. He bought the laptop through Lenovo’s website.

Lenovo advertised that the battery of the Yoga 2 would last up to nine hours on a single charge. Medeiros, however, found that the battery life on his Yoga 2 wouldn’t last nine hours, or even close to nine hours.

Medeiros filed a putative class-action lawsuit against Lenovo. Medeiros’s complaint had two claims: violations of section 75.1.1, and breach of express warranty.

Terms and Conditions

The fact pattern here seems tailor-made for a consumer-fraud claim. A large manufacturer made a specific claim about a product for the purpose of attracting sales, but the claim—at least allegedly—turned out to be misleading.

Medeiros’s own complaint, however, revealed an important detail about his purchase of the laptop: he agreed, in a click-wrap agreement, to Lenovo’s terms and conditions. On Lenovo’s motion to dismiss, the court considered those terms and conditions. They called for North Carolina law to govern Medeiros’s claims.

Even more importantly, the terms and conditions incorporated Lenovo’s limited warranty. The warranty provides an exclusive remedy if the laptop has a defect in materials or workmanship: repair, replacement, or a refund, at Lenovo’s option.

The click-wrap agreement, and the incorporated limited warranty, sealed the fate of Medeiros’s claims.

Three Bases for Dismissal

The Medeiros court used a three-part approach when it dismissed Medeiros’s 75-1.1 claim.

First, the court initially characterized Medeiros’s 75-1.1 claim as a breach of warranty. A breach of warranty alone, even an intentional breach, does not violate section 75-1.1. A violation would require substantial aggravating circumstances attendant to the breach.

Those circumstances were absent here. According to the court, even if a manufacturer knows that its product will not conform to promises stated in a warranty, a plaintiff has a claim for intentional breach of warranty, not a 75-1.1 claim.

Second, the court concluded that the economic-loss rule barred the 75-1.1 claim. This judge-made rule provides that a contract dispute generally does not state a tort claim. When the court invoked the economic-loss rule, it used the same double-edged reasoning that other courts have used when analyzing product-liability claims under section 75-1.1:

  • If the 75-1.1 claim is considered a variation on a claim for breach of contract, the claim fails for lack of substantial aggravating circumstances.
  • If, on the other hand, the 75-1.1 claim is considered a tort claim, the economic-loss rule bars the claim.

Finally, the Medeiros court dismissed the 75-1.1 for a third, independent reason: a failure to allege reliance on the alleged misrepresentation.

The court’s discussion on this issue involved two notable recent decisions: In re GNC and Solum v. CertainTeed.

In GNC, the Fourth Circuit held that a section 75-1.1 claim based on a misrepresentation must allege either that the representation is literally false or that the representation is misleading. The GNC court borrowed this framework from the Lanham Act. As we have shown, these standards have drawn criticism from some commentators.

The Medeiros court concluded that the complaint tried to allege literal falsity, but failed to do so. Literal falsity would mean that no one was getting nine hours of battery life on a single charge; Medeiros’s complaint did not allege that.

For the same reason, the court did not consider Lenovo’s nine-hour claim misleading. Because at least some consumers might experience nine hours of battery life, a reasonable consumer would not be deceived by the nine-hour claim.

The court then relied on Solum for the point that a complaint must show the plaintiff’s actual and reasonable reliance on a misrepresentation. In Solum, as in Medeiros, a plaintiff entered into a click-wrap agreement. Even at the pleading stage, the court held that the terms of the agreement negated any allegation of reasonable reliance on the alleged misrepresentation.

Medeiros’s complaint likewise did not plead reasonable reliance on the “up to nine hours” representation. In fact, the complaint did not plead that Medeiros relied at all on that representation. This lack of actual and reasonable reliance sounded the death knell for Medeiros’s 75-1.1 claim.

A Growing Body of Case Law with Serious Consequences

Medeiros is the latest decision that dismisses a consumer’s 75-1.1 claim at the pleading stage. The complaints in these cases suffer from similar flaws: thin allegations of reliance, vague allegations of misrepresentations, and defendant-friendly contract terms.

These cases give defendants a great incentive to pursue motions to dismiss. In most federal courts, a motion to dismiss will prevent plaintiffs from pursuing discovery—where defense costs alone can give the plaintiffs settlement leverage. In state courts, likewise, a defendant can seek a discovery stay while a motion to dismiss is pending.

These decisions on Rule 12 motions, then, have a serious impact on litigation strategy. A putative class action that is based on a 75-1.1 claim is unlikely to draw a serious settlement offer unless the complaint contains robust allegations about the alleged misrepresentation, the plaintiff’s reliance on that misrepresentation, and why claims about the misrepresentation are not governed by a contract.

Even then, a plaintiff faces more trouble: detailed allegations about a named plaintiff’s reliance on an alleged misrepresentation might fuel arguments that the claim is not appropriate for class certification.

In sum, these decisions should be a cause of concern—potentially nine hours’ worth—for consumers’ lawyers.

Author: Stephen Feldman

March 8, 2016
Posted in  Economic-Loss Rule Misrepresentations Substantial Aggravating Circumstances