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April 9, 2019 in 75-1.1 Exemptions by

Glengarry Glen Economic Loss Rule

This post studies a recent decision about a sales agent who’s upset with the quality of his leads.

An initial sidebar: the agent wasn’t peddling real estate, but it’s almost impossible to read the decision without thinking of this outstanding movie. David Mamet is a genius.

But, setting aside whether coffee is for closers, the new decision—called Dillon v. Leazer Group—is an important one because it addresses a recurrent issue in litigation about N.C. Gen. Stat. § 75-1.1: the economic-loss rule.

Friends of the blog are surely familiar with the economic-loss rule, which stops a party from recovering in tort when a contract governs the same subject-matter.

Notably, the rule often forms one edge of a double-edged sword for contract-based 75-1.1 claims. The other edge is the requirement that a contract-based 75-1.1 violation show “substantial aggravating circumstances” attendant to the contract breach. To avoid the economic-loss rule, a claimant might describe a 75-1.1 claim as less like a tort and more like a contract breach. But the more it sounds like a contract claim, the more likely the 75-1.1 claim will need to include show “substantial aggravating circumstances.” And that can be a hard showing to make.

This long windup brings us to the new Dillon decision. The case concerns the relationship between the plaintiff sales agent (Dillon) and a multi-level marketing company that offers insurance products (Leazer).

Dillon signed an agreement with Leazer to buy leads from Leazer and to recruit other agents. Dillon paid a premium to get certain “Platinum leads,” but Dillon contends that those leads were actually old and stale.

Dillon then sued. His complaint contains a claim for breach of contract, a barrage of business torts, and a violation of section 75-1.1.

Leazer moved to dismiss the tort claims and the 75-1.1 violation as barred by the economic-loss rule.

That argument had teeth. In her opinion, Judge Louise W. Flanagan showed that multiple aspects of the tort and 75-1.1 claims concern the same subject-matter as Dillon’s contract with Leazer. The tort and 75-1.1 claims all concern alleged misrepresentations about leads—the subject-matter of the contract. The contract contains headings such as “Request for Leads,” “Diligent Use of Leads,” “[Leazer] to Supply Leads,” and “Payment for Leads.”

Dillon responded to the economic-loss rule argument by citing a relatively recent decision by the North Carolina Court of Appeals called Bradley Woodcraft, Inc. v. Bodden. That decision implied that fraud claims are never subject to the economic-loss rule. We predicted that a 75-1.1 claimant might try to rely on Bradley Woodcraft to argue that any fraud-based 75-1.1 violation escapes the economic-loss rule. And because fraud can be “a substantial aggravating circumstance,” a claimant could use Bradley Woodcraft to sidestep the double-edged sword discussed above.

But we questioned whether Bradley Woodcraft could really bear that much doctrinal weight. The 75-1.1 claim in Bradley Woodcraft concerned a contractor’s extra-contractual statements about his qualifications and later representations about potential damage to the plaintiff’s home. In other words, the claim didn’t concern the contractor’s contract with the plaintiff homeowner. It concerned misrepresentations independent of the contract.

That’s important, because the economic-loss rule has an exception called the “independent tort doctrine.” Under this doctrine, a tort action can be pursued, even if it’s related to a contract breach, if the tort claim is identifiable and distinct from the primary contract breach. The fraudulent statements in Bradley Woodcraft seemed to fit comfortably within this exception.

Judge Flanagan endorsed this reasoning. She concluded that the alleged misrepresentations in Bradley Woodcraft were independent of the alleged contract breach in that case, and that the economic-loss rule didn’t apply in Bradley Woodcraft for that reason.

Judge Flanagan then explained that the tort claims and 75-1.1 claim in Dillon, unlike those claims in Bradley Woodcraft, did not feature any extra-contractual issues. Dillon’s tort and 75-1.1 claims concerned the performance of the contract. The economic-loss rule barred those claims.

Judge Flanagan’s reasoning is significant. Bradley Woodcraft, itself, didn’t explicitly address the independent-tort exception, although the exception was raised in the briefing. By distinguishing the case on this basis, Judge Flanagan provides a path for courts and litigants to reconcile Bradley Woodcraft with earlier decisions on the economic-loss rule.

Judge Flanagan also noted that Bradley Woodcraft clashes with the Fourth Circuit’s seminal decision in Broussard v. Meinecke Discount Muffler Shops, Inc. In Broussard, the Fourth Circuit—applying North Carolina law—concluded that the economic-loss rule barred a fraud claim.

In sum, Dillon is a good starting point if you’re thinking of alleging fraud in a case about a contract, or if you’re defending against that type of claim. The economic-loss rule will no doubt play a meaningful role in determining what claims go forward.

Author: Stephen Feldman