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April 26, 2016 in 75-1.1 Exemptions by

Contracts and Unfair Trade Practices, Redux

A recent decision by the North Carolina Business Court underscores the challenges faced by a party who tries to convert a breach of contract into a violation of N.C. Gen. Stat. § 75-1.1.

A breach of contract alone, even if intentional, does not violate section 75-1.1. The plaintiff must show substantial aggravating circumstances attendant to the breach. That showing usually requires a showing of deceptive conduct.

What, though, if substantial aggravating circumstances are hard to plead? The plaintiff might try to recharacterize his 75-1.1 claim to make it seem less like a breach of contract.

That recharacterization, however, would expose the plaintiff to a different attack: Facts that suggest a breach of contract usually do not give rise to a tort claim. This doctrine, often called the economic-loss rule, might sound the death knell for a recharacterized 75-1.1 claim that is styled like a tort claim.

These principles take center stage in Judge Gregory P. McGuire’s decision in Broadnax v. Associated Cab & Transportation Inc.

The Wheels on the Bus Came to a Grinding Halt

The Broadnax plaintiffs drove school buses for Wake County students. The plaintiffs did not have contracts directly with the Wake County Public School System. Instead, they contracted with a company called Associated Cab. Associated Cab, in turn, agreed to transport Wake County students to and from school.

The plaintiffs sued Associated Cab because, in essence, it didn’t pay the plaintiffs the compensation due under their contracts. In particular, the plaintiffs accused the company of making unauthorized deductions from the plaintiffs’ pay. The deductions took several forms, including “office fees.”

The plaintiffs also accused Associated Cab of lying to them about the deductions. According to the complaint, Associated Cab told the plaintiffs that the company wouldn’t make unauthorized deductions—but the company helped itself to those deductions anyway. The complaint alleges that the plaintiffs relied on these misrepresentations.

The plaintiffs raised eight claims, including a 75-1.1 claim and a fraud claim, based on this fact pattern.

Associated Cab filed a motion to dismiss. The company raised two arguments specific to the plaintiffs’ 75-1.1 claim.

First, the company argued that the plaintiffs cannot sue for fraud because their dispute is based on the terms of their contracts.

Second, the company argued that the 75-1.1 claim is no more than a claim for an intentional breach of contract.

A Contract Dispute

Judge McGuire agreed with Associated Cab and dismissed the section 75-1.1 claim. His opinion offers guidance to future litigants as they consider the intersection of contract claims, tort claims, and 75-1.1 claims.

First, Judge McGuire clarified that, to state a fraud claim against a contracting party, a plaintiff must allege conduct “distinct from the primary breach of contract claim.”

This principle sealed the fate of the Broadnax plaintiffs’ fraud claim. The fraud claim, after all, relied on the same facts as the contract claim: the company’s failure to pay the plaintiffs their full compensation.

Judge McGuire then pivoted to the 75-1.1 claim. His opinion explained that, like a fraud claim, a 75-1.1 claim must be distinct from a claim for breach of contract. In Broadnax, the complaint failed to distinguish the 75-1.1 claim from the plaintiffs’ contract claim. Indeed, it did the opposite. It alleged that the company’s duties regarding the plaintiffs’ compensation were “made in, or in conjunction with, the subcontracts.”

Second, Judge McGuire reiterated that a 75-1.1 claim premised on a contract breach must show substantial aggravating circumstances attending the breach.

His opinion then turned to the specific allegations in Broadnax. The plaintiffs alleged only that the company entered into contracts that the company never intended to fulfill, or that the company intentionally breached those contracts. These claims, Judge McGuire explained, fell squarely within the plaintiffs’ breach-of-contract claim. They mirrored the types of 75-1.1 claims that courts have dismissed for failure to allege substantial aggravating circumstances.

Distinguishing Contract Claims and 75-1.1 Claims

The Broadnax decision shows why an alleged section 75-1.1 violation is unlikely to succeed as a mere tag-along claim when a complaint also alleges (in substance) a contract breach.

If the basis for the 75-1.1 violation is not distinct from the contract breach, the 75-1.1 claim must clear the bar for pleading substantial aggravating circumstances. As Broadnax shows, alleging deception as part of the breach might not be enough.

A plaintiff might try to avoid this problem by creating the perception that the 75-1.1 claim is distinct from the breach, and is instead more like a tort. Broadnax, however, makes clear that such a 75-1.1 claim must derive from a duty independent of the relevant contract.

Overall, these points show that, when a contract is involved, a party who wants to assert a 75-1.1 violation must carefully select a viable theory.