An Important New Decision on Substantial Aggravating Circumstances
Ellis & Winters
North Carolina courts regularly dismiss claims for violation of N.C. Gen. Stat. § 75-1.1 where the allegations amount to nothing more than a breach of contract.
A recent decision by Judge Adam M. Conrad of the North Carolina Business Court, however, provides a potential pathway around that doctrine. In LendingTree v. Intercontinental, Judge Conrad denied a motion to dismiss a section 75-1.1 claim even though the parties’ contract created the duties that gave rise to the action.
This post examines how Judge Conrad reached that result.
Intercontinental Hires LendingTree’s Key Employees
LendingTree describes itself as an online loan marketplace. It allows mortgage seekers to have potential lenders compete to provide a loan.
Intercontinental is a lender that has a contract with LendingTree. Intercontinental does business across the country under the trade name eQualify.
Intercontinental’s contract with LendingTree forbids Intercontinental from hiring LendingTree employees. LendingTree had no contract with eQualify.
LendingTree alleged that Intercontinental breached the contract by recruiting and hiring LendingTree’s employees. Daniel Wilson, former Chief Architect of Technology at LendingTree, and Laura Ashley Brooks, LendingTree’s Senior Director of Product Management, were among the targeted employees. Both Mr. Wilson and Ms. Brooks joined Intercontinental, and LendingTree alleged that these employees were tasked with building a system to compete directly with LendingTree.
After learning about the departures, LendingTree accused Intercontinental of a contract breach. Ron Fountain, Intercontinental’s President and General Counsel, responded and denied a breach. Mr. Fountain specifically noted that the employees were employed by eQualify, not Intercontinental.
LendingTree then sued Intercontinental, eQualify, and the two former employees. The complaint included both contract and tort theories. Against Intercontinental, LendingTree also included a section 75-1.1 claim.
Intercontinental moved to dismiss the section 75-1.1 claim on two grounds.
First, Intercontinental argued the tried-and-true defense that a mere breach of contract cannot give rise to a section 75-1.1 claim.
In its second—and more novel argument—Intercontinental attempted to take advantage of the learned-profession exemption to section 75-1.1 liability.
Judge Conrad rejected both of these arguments.
You Can Breach, But You Better Not Enjoy It
Intercontinental argued that LendingTree’s claim was nothing more than a breach of contract: its contract with LendingTree, Intercontinental contended, spelled out the obligations that gave rise to the conduct at issue.
Judge Conrad, however, identified potential aggravating circumstances that could elevate a breach of contract to a section 75-1.1 claim. He focused in particular on two actions by Intercontinental:
- Intercontinental’s attempt to circumvent the non-solicitation provision by having its alter ego, eQualify, hire the employees—even though the employees were providing services to Intercontinental; and
- Intercontinental’s denial that it had breached the agreement. That denial, Judge Conrad explained, was “akin to concealment of a breach.”
These actions by Intercontinental, Judge Conrad explained, reflected deception in connection with the breach. As we have noted before, the “substantial aggravating circumstances” doctrine evolved from decisions that involved deceptive conduct. Judge Conrad’s ruling confirms the vitality of this doctrine.
Notably, in reaching this ruling, Judge Conrad noted that the amended complaint alleged that Intercontinental enjoyed “both the benefit of its bargain and the benefit of its breach.” This statement, if read in isolation, might imply that an intentional breach of contract is a 75-1.1 violation. Judge Conrad, however, explained that—in this case—Intercontinental had stated a cognizable 75-1.1 claim because of its deceptive conduct. He then cited to two decisions—Sparrow Systems v. Private Diagnostic Clinic, and Interstate Narrow Fabrics v. Century USA—to emphasize the point. In both Sparrow Systems and Interstate Narrow Fabrics, a 75-1.1 claim survived a dispositive motion because of deceptive conduct related to a contract.
It’s Not Always the Lawyer’s Fault
Intercontinental also tried to blaze a new legal path with its second argument to avoid liability.
In raising a section 75-1.1 claim, LendingTree had focused on Intercontinental’s deceit in hiding its breach of contract through the letter that professed that the employees were actually eQualify’s employees. Because its lawyer wrote that letter, Intercontinental argued that the learned-profession exemption to section 75-1.1 liability barred the claim.
Judge Conrad made quick work of this theory: he pointed out that LendingTree’s claim concerned Intercontinental’s actions in hiring LendingTree’s employees. Thus, the 75-1.1 claim did not rest solely on the actions of an attorney.
In addition, Intercontinental’s attorney sent the letter to LendingTree in his capacity as the company’s general counsel and president. The acts of a company officer do not enjoy the protection of the learned-profession exemption.
Pleading Around a Mere Breach of Contract
Judge Conrad’s decision shows that a plaintiff may be able to construct a contract-based section 75-1.1 claim by focusing on the defendant’s deceptive conduct after the breach. If the defendant took steps to avoid the plaintiff discovering the breach, those steps may constitute sufficient substantial aggravating circumstances to allow a section 75-1.1 claim.
Author: Jeremy Falcone