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When an internal business dispute has external features

Ellis Winters

Ellis & Winters

Food and drink are staples of the caselaw on unfair and deceptive trade practices. Roasted soybeans. Hot dogs. Poultry. Beef. Bourbon.

Today, wine.

In particular, a business called Wine & Design. It caters to those who desire to sip a traditional Gamay while living out their Andrew Wyeth-inspired dreams.

The business developed from two partners. But the partners had a falling out, and their fractured relationship fueled heated and ongoing litigation in the North Carolina Business Court.

The litigation includes a decision by Judge Gregory P. McGuire on the circumstances in which a fight between business owners can violate N.C. Gen. Stat. § 75-1.1. This post concerns that decision.

Emily Preiss and Harriet Mills co-founded Wine & Design in 2011. The name of the business describes what it offers: a social experience where you can drink wine and paint. The business features a design studio in Raleigh and a limited-liability company organized to franchise the concept to other locations. Within three years, the franchise company acquired forty franchise locations along the East Coast.

The founders’ personal relationship, however, didn’t fare as well. Facing allegations that she struggled with drug addiction, Preiss enrolled—allegedly under pressure from Mills and others—at a treatment facility in Florida. But she left after four days of a thirty-day program.

When she came back to Raleigh, Preiss found herself locked out of the business and removed from the companies’ bank accounts. An extended negotiating period followed, and it culminated in a restructuring that left Preiss with 100% of the membership interest in the Raleigh studio, and with Mills holding the majority of the interest in the franchise company. Mills also effectively controlled the franchise company’s operations.

Unfortunately, the restructuring didn’t stop things from devolving further. Preiss accused Mills of not making monthly distributions to Preiss from the franchise company, despite having adequate reserves. Preiss also accused Mills of self-dealing.

Preiss then sued Mills. Her complaint included an alleged violation of section 75-1.1.

On these facts, you might reasonably surmise that the 75-1.1 claim stood little chance of success:  the lawsuit sounds like a classic internal business dispute, and an internal business dispute does not fall within the ambit of section 75-1.1.

But Judge McGuire’s opinion shows that this doctrine’s application can demand granular analysis.

In Wine & Design, some of the complaint’s allegations concern actions internal to the franchise company before the restructuring. Section 75-1.1 doesn’t apply to those actions.

It also doesn’t apply to Preiss’s allegations that Mills internally mismanaged the franchise company, even after the restructuring. That alleged mismanagement included the assertions about distributions. All of that alleged conduct is internal to a single business—the franchise company.

But the complaint described additional conduct that allegedly violates section 75-1.1. That additional conduct includes dealings between the Raleigh studio and the franchise company after the restructuring. According to the complaint, the restructuring cast the Raleigh studio and franchise company as two separate businesses. Judge McGuire concluded that—at the Rule 12(b)(6) stage—the conduct between the two companies after the restructuring was “arguably” within the bounds of section 75-1.1.

Preiss’s lawyers, however, probably didn’t pop the Prosecco too quickly. In rendering his decision, Judge McGuire observed that the allegations about dealings between the two companies—allegations that concerned a trademark agreement between the companies, as well as the company website—“are thin.”

Where does this leave us?

For one, Wine & Design shows the attention that’s demanded when drafting a complaint that alleges unfair and deceptive trade practices. If you’re the type of drafter who thinks vague pleading is good pleading, you better be ready for your allegations to be parsed—even under North Carolina’s notice-pleading standard—to see if they fall within the scope of section 75-1.1

Wine & Design also reiterates the Business Court’s consistent admonition that 75-1.1 claims about disputes internal to a company will have a short shelf life.

Finally, Wine & Design suggests that, even if a complaint can point to conduct between two separate businesses, it might not be a wise tactical decision to raise the claim. To state the obvious, having a claim described as “thin” in connection with a Rule 12(b)(6) motion does not paint an optimistic forecast for the claim’s merits at summary judgment.

A forecast, however, is just that—a guess about what might happen later. Preiss and her legal team ultimately have control over marshaling proof of a 75-1.1 violation, and the evidentiary canvas is not dry. But whether or not she marshals that proof, Preiss spent a non-trivial amount of time, resources, and credibility defending a 75-1.1 claim that mostly fell within a well-known exception.

Author: Stephen Feldman

November 6, 2018
Posted in  75-1.1 Exemptions