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Heightened Pleading Required in Omission-Based Kitty Litter/Beer Carton Dispute

This blog is no stranger to litigants attempting to transform run-of-the-mill contract disputes into claims for unfair or deceptive trade practices. Nor are our North Carolina courts, given the prospect of recovering treble damages and attorneys’ fees to a spurned business.

Today’s post looks at a recent decision from the United States District Court for the Middle District of North Carolina where the plaintiff tried to ferment a contract claim into a claim under section 75-1.1 using the yeast of a fraudulent omission. Although the decision reached a predictable result, it is notable for its application of the heightened pleading standards in Rule 9(b) to a claim resting on a fraudulent omission.

Previous cases have applied the Rule 9(b) standard to section 75-1.1 claims predicated on fraudulent misrepresentations, both in federal court and in state court. The Middle District’s decision applied the same exacting standard to an omission-based claim and found the pleadings wanting.

Kitty Litter and Beer Cartons

The plaintiff, Packrite, LLC, specializes in finishing corrugated and folding carton packaging. The defendant, Graphic Packaging International, LLC, manufactures similar products.

Packrite and Graphic worked together on projects beginning in 2012. The dispute that led to litigation began with a 2016 opportunity to produce packaging for Clorox Kitty Litter. Graphic asked for Packrite’s assistance, but both companies worried that they did not have the resources to take on such a large project.

According to Packrite’s complaint, Graphic’s Director of Operations, Chris Berndt, threw some extra chips into the kitty. Berndt told Packrite that if it helped with the Kitty Litter project, Graphic would enter into a three-year contract with Packrite under which Packrite would be the sole producer for Graphic’s requirements of beer cartons—a deal worth approximately $10 million a year in gross revenue to Packrite. Packrite claims that it agreed to assist with the Kitty Litter project based on that sweetener.

Graphic Reaffirmed Its Promise

Packrite next alleged that it met with Kristopher Dover, Graphic’s Vice President of Operations. Dover told Packrite that Berndt did not have the authority to commit Graphic to the Beer Carton project, but that Graphic would nonetheless honor the original promise and commit to that project.

According to Packrite, this is where the brew started to sour. Graphic provided Packrite with an initial draft of the contract for the Beer Carton project, and Packrite sent back revisions, but Graphic never responded to the proposed revisions, though Graphic and Packrite continued to negotiate through May 2017.

Packrite alleged that Graphic had decided that it did not want to move forward with Packrite as of the end of February 2017, and that Graphic was stalling on finalizing the contract to develop its exit strategy. This activity would later form the basis for Packrite’s fraudulent omission claim—that Graphic knew that it was not going to move forward with Packrite but concealed that decision for months while it pretended to negotiate the contract for the Beer Carton project.

Ultimately, the parties never signed the contract for the Beer Carton project, and litigation ensued.

Packrite’s Third Bite at the Apple

All of this activity took place in late 2016 and early 2017. So why did this decision not arrive until December 2020? Packrite sued Graphic in state court in late 2017, and Graphic removed the case to federal court. The parties then engaged in several years of motion practice, and Packrite amended its complaint twice. Its second amended complaint, now at issue, was filed in July 2020. In response, Graphic moved to dismiss both Packrite’s fraudulent omission claim and its section 75-1.1 claim.

Heightened Pleading Standards for Fraud

Of course, both the North Carolina rules and federal rules include a version of Rule 9(b) that requires pleading fraud-based claims “with particularity.” Typically, that means going back to journalism school and pleading the “who, where, when, and what” of the alleged fraud. But in an omission case, the rule requires pleading that the defendant had a duty to speak, along with the specifics of the omission. Those specifics include things like the reason why the information withheld was material, what the defendant gained by withholding information, and why the reliance on the omission was both reasonable and detrimental.

Packrite Failed to Establish a Duty to Disclose

In this instance, the first requirement—alleging a duty to disclose—proved fatal for Packrite’s claims. The court noted that where commercial parties are in arm’s-length negotiations, they typically have no duty to disclose.

Packrite claimed that Graphic took affirmative steps to conceal its decision not to move forward with the contract for the Beer Carton project, and that led to a duty to make a full and fair disclosure once Graphic spoke on the contract, even if there was no general duty to disclose. Those affirmative steps, according to Packrite, included offering pretextual excuses for a delay in responding to the revisions to the written contract, directing Packrite to undergo qualification trials for MillerCoors, and withholding quality claims to conceal from Packrite that it was not going to be awarded the contract.

The court rejected these arguments and granted Graphic’s motion to dismiss the fraudulent omission claim.

Failure to Plead Fraudulent Omission Doomed the Section 75-1.1 Claim

The upshot of the decision rests on the principle that plaintiffs who plead a fraud-based claim for unfair or deceptive trade practices must also meet the pleading standards in Rule 9(b). Not holding a plaintiff to those standards would undermine one of the fundamental purposes of Rule 9(b)—providing notice to the defendant of the specifics of a fraud claim.

The court confirmed that Rule 9(b) applies to a section 75-1.1 claim based on a fraudulent omission and dismissed Packrite’s claim for the same reasons that it dismissed the fraudulent omission claim. 

The court took one step further and ruled once again that “[a] contract dispute between sophisticated commercial parties cannot be transformed into a tort claim because of bad business decisions resulting in loss.”

Lessons Learned

The Packrite decision is a good reminder of the need to detail fraud claims with particularity when they form the basis for an alleged unfair or deceptive trade practice. That holds true whether the claims are affirmative misrepresentations or omissions. And of course, when you want to create a section 75-1.1 claim from a contract dispute, you better have facts with the weight and quality of Heady Topper or Pliny the Elder; Miller Lite just won’t do.

Author: Jamie Weiss

January 5, 2021 James M. Weiss
Posted in  Misrepresentations