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When Does Section 75-1.1 Reach Out-of-State Conduct? (Part II of a two-part series)

Ellis Winters

Ellis & Winters

In yesterday’s post, we discussed the current standards that decide when section 75-1.1 applies to acts outside North Carolina.

Those standards raise this question:  Do overcharges on goods bought by North Carolina consumers qualify as a substantial in-state effect?

Two recent decisions (both from the U.S. District Court for the Eastern District of Michigan) gave opposite answers to that question.

Similar Facts, Different Outcomes

The first decision was In re Refrigerant Compressors Antitrust Litigation. This multidistrict litigation involved price fixing on refrigerator parts that liquefy Freon.

The plaintiffs in the case hailed from several states, including North Carolina. The North Carolina plaintiffs asserted, among other claims, a 75-1.1 claim. In a motion to dismiss, the defendants argued that the plaintiffs had not alleged a substantial in-state injury, as The “In” Porters, S.A. v. Hanes Printables, Inc. requires. (Part I of this post explains the “In” Porters decision and its background.)

The court concluded that inflated prices paid by a retail customer were an incidental, rather than substantial, in-state injury. The court thus dismissed the section 75-1.1 claim. See pages *18-19 of the opinion.

The second case was In re Automotive Parts Antitrust Litigation. This case involved the same fact pattern, but a different product and a different district court judge. The plaintiffs, who included North Carolina buyers of automobiles, alleged that the defendants conspired outside North Carolina to fix prices on auto parts. This conduct allegedly raised the prices of new vehicles and replacement parts. The North Carolina plaintiffs pursued, among other claims, a 75-1.1 claim. Once again, the defendants moved to dismiss the 75-1.1 claim based on The “In” Porters.

The Automotive Parts court wrote that it was unpersuaded by Refrigerant Compressors. On page *18 of its opinion, the court held that the substantial or incidental nature of an in-state injury is a “fact-based inquiry” that cannot be decided at the Rule 12 stage. The court thus denied the defendants’ motion to dismiss.

Diagnosing the Problem

How did the same court reach opposite conclusions on the same issue in these similar cases? The most likely culprit is a lack of definition on what qualifies as a substantial in-state effect.

In each of the above opinions, the Eastern District of Michigan stated a conclusion without laying out any criteria for the substantiality of in-state injuries. The decisions of other courts read similarly. They decide, without much explanation, that a particular injury either does or does not amount to a substantial effect in North Carolina.

A handful of decisions, however, contain deeper analysis. Consider, for example, the decision of the Eastern District of Pennsylvania in In re Flonase Antitrust Litigation. There, the plaintiff alleged that a manufacturer raised the price of the drug Flonase through sham patent litigation. The complaint included a 75-1.1 claim. When the manufacturer moved to dismiss the 75-1.1 claim for lack of a substantial in-state injury, the court noted two specific allegations in the complaint: First, the manufacturer sold “large amounts” of Flonase in North Carolina. Second, the manufacturer had “two large development and production facilities” here. According to the court, these allegations plausibly stated a substantial in-state effect.

At this point, though, the data points on what qualifies as a substantial in-state injury are few and far between. Litigants are mostly left to speculate on what facts will decide the substantiality issue. Any number of factors—the magnitude of an overcharge, the number of consumers, or even the defendant’s location—could play a role in the analysis. 

Lessons from These Cases

These cases offer at least two lessons for businesses that operate outside North Carolina, but whose products or services make their way into the state.

First, a business that faces a 75-1.1 claim based on out-of-state conduct should examine whether any alleged injury took place in North Carolina. If not, the 75-1.1 claim should fail at the threshold.  This issue lingered in the background of Refrigerant Compressors. The court noted that the complaint “contain[s] no allegations as to where each [plaintiff] purchased Compressor Products or where it claims to have been injured.”

Second, a 75-1.1 claim will be more likely to survive a motion to dismiss if the defendant’s product or service is widely distributed in North Carolina. Automotive Parts and Flonase both imply that the substantiality of an in-state injury turns, at least to some degree, on the sheer amount of a defendant’s product that is sold in North Carolina.

Ryan Lipes, a summer associate at Ellis & Winters, contributed to this post.

Author: Matt Sawchak

August 13, 2014
Posted in  Choice of Law