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An Important New Decision on Whether Section 75-1.1 Applies to Multistate Conduct

Ellis Winters

Ellis & Winters

Last week, the U.S. District Court for the Middle District of North Carolina issued a meaty decision about N.C. Gen. Stat. § 75-1.1. The decision, in a case called SmithKline Beecham Corp. d/b/a GlaxoSmithKline v. Abbott Laboratories, merits a close read by all North Carolina business litigators.

In the decision, Judge William Osteen, Jr. assessed, and ultimately rejected, Abbott’s motion for judgment on the pleadings on GSK’s section 75-1.1 claim. Abbott contended that either Pennsylvania or New York law governs GSK’s claim. Because neither Pennsylvania nor New York law recognizes unfair-trade-practices claims outside of the consumer-protection context, Abbott argued that GSK cannot pursue its section 75-1.1 claim.

The choice-of-law rule in North Carolina for section 75-1.1 claims is unsettled. Judge Osteen therefore addressed two questions:

  1. What choice-of-law rule should apply to GSK’s section 75-1.1 claim?
  1. Under the selected rule, what law governs? North Carolina, Pennsylvania, or New York?

This post analyzes Judge Osteen’s decision.

A “Lump of Coal” Yields a Lawsuit for Treble Damages

The GSK case concerns a drug manufactured by Abbott to treat HIV infection. The drug, called Norvir, is a protease inhibitor. Norvir can prevent immature HIV from becoming a mature virus.

When paired with other protease inhibitors, Norvir can improve patient outcomes related to HIV. For this reason, GSK relied on Norvir’s availability when GSK developed its own protease inhibitors.

In 2002, Abbott and GSK entered into a license agreement to allow GSK to promote Norvir with GSK’s protease inhibitors. New York law governed the agreement.

GSK then introduced a new protease inhibitor to be used specifically with Norvir. Two weeks after this introduction, however, Abbott raised the price of Norvir by four-hundred percent. In its lawsuit, GSK alleged that this price increase prevented GSK from promoting its new protease inhibitor at a competitive price, and thereby caused GSK to lose market share.

GSK also alleged that, during contract negotiations, Abbott concealed its plan to hike prices. As some evidence of this allegation, GSK pointed to a statement by a senior Abbott executive after the price increase, in which the executive congratulated his Abbott colleagues on “giving a lump of coal to . . . GSK for the holidays.”

Choosing a Choice-of-Law Rule for Section 75-1.1 Claims

GSK sued Abbott for violation of section 75-1.1. GSK filed the case in federal court in California. The California court later transferred the case to the Middle District.

Abbott then filed a motion for judgment on the pleadings. Abbott argued that, under North Carolina’s choice-of-law rules (which apply in federal court), GSK could not pursue a section 75-1.1 claim. According to Abbott, the laws of either Pennsylvania (GSK’s corporate headquarters) or New York (the law that governs the license agreement) apply to the claim. Abbott reasoned that GSK cannot pursue its 75-1.1 claim because Pennsylvania and New York do not permit a business to assert an unfair-trade-practices claim against another business.

Abbott’s motion teed up an unsettled, but critical, issue in 75-1.1 jurisprudence: What choice-of-law rule applies to section 75-1.1 claims?

The issue is unsettled because (a) the North Carolina Supreme Court has not addressed the issue, and (b) the North Carolina Court of Appeals has issued conflicting decisions:

  • Some decisions apply the lex loci test. Under that test, the court applies the law of the state where the claimant was injured.
  • Other decisions apply the most significant relationship test. Under that test, the court applies the law of the state having the most significant relationship to the occurrence that gave rise to the action.

Judge Osteen’s opinion goes into some depth about which courts have applied which test. He noted that federal courts appear to favor the lex loci test. He also noted that at least two Fourth Circuit decisions apply the most significant relationship test if the place of injury is unclear.

After reviewing these decisions, Judge Osteen applied the lex loci test. He concluded that, under that test, North Carolina law governs GSK’s section 75-1.1 claim.

To reach this conclusion, Judge Osteen explained that the place of injury in a section 75-1.1 claim is the state where the last act occurred that gave rise to the injury. Here, GSK’s injury is lost market share and lost profits. The parties disagreed about where GSK suffered that injury. Abbott pointed to Pennsylvania, site of GSK’s corporate headquarters. GSK pointed to North Carolina, site of its HIV business.

Which argument won the day? Judge Osteen essentially left the question open. He explained that GSK had plausibly pleaded that GSK suffered its injury in North Carolina, and that that allegation was enough at the Rule 12 stage to deny the motion.

After deciding to apply the lex loci test, however, Judge Osteen then said that the most significant relationship test would yield the same result. He explained that the key factor in that test is the place where the relationship between the parties is centered. Here, the relationship between GSK and Abbott was centered in North Carolina. That is because GSK operates its HIV-drug operations out of its North Carolina offices. In addition, those offices were the site of the alleged misrepresentations. These facts outweighed the fact that Pennsylvania was GSK’s corporate headquarters.

As a final step in the choice-of-law analysis, Judge Osteen rejected Abbott’s argument that New York law—the law that governs the licensing agreement—applies to GSK’s unfair-trade-practices claim.

Judge Osteen first explained that, because a section 75-1.1 claim does not require a contract, a choice-of-law clause in a contract is not dispositive of what law applies to the claim.

Judge Osteen then showed that the choice-of-law clause in the license agreement does not apply to a section 75-1.1 claim in any event, because GSK’s 75-1.1 claim does not rely on the validity or enforceability of any provision in the agreement.

Making Wise Choices when the Choice of Law Is Uncertain

As Judge Osteen’s opinion shows, the operative choice-of-law regime can have enormous stakes in section 75-1.1 litigation. How can a 75-1.1 claimant deal with the uncertainty in North Carolina’s regime?

First, the claimant can allege facts that would carry the day regardless of which test applies. In many cases, like the GSK case, the same facts are critical to both tests.

Second, a section 75-1.1 claimant can discern what evidence its adversary might marshal that would bear on choice of law. A claimant can then tailor its interrogatory responses, and prepare its deposition witnesses, to avoid volunteering points that might have negative consequences in a choice-of-law analysis.

Third, a 75-1.1 claimant should assess the extent to which its theory is intertwined with any contract that has a choice-of-law provision. In the GSK case, a misrepresentation claim related to contract negotiations fell outside of the contract’s choice-of-law provision. An aggravated-breach claim, in contrast, might well be subsumed in a contract’s choice-of-law provision.

High-stakes commercial litigation often features interstate transactions and communications. As the GSK decision shows, the availability of treble damages can hinge on whether and how a complaint describes the nitty-gritty of those transactions and communications.

Author: Stephen Feldman

March 28, 2017
Posted in  Choice of Law