Litigating [In]Securities: How Conduct Standards Intersect with the Securities Exemption’s Rationale
Thomas H. Segars
Today’s post examines an intersection of two familiar topics: (1) the “conduct standards” by which conduct is judged to be “unfair,” and (2) the “pervasively regulated conduct” rationale for section 75-1.1’s securities exemption.
Robichaud v. Engage2Excel, Inc., a new decision from the U.S. District Court for the Western District of North Carolina, suggests that the topics may be related. We will unpack Robichaud below. But let’s first reorient ourselves to each of these topics.
Section 75-1.1 prohibits “unfair” conduct. But how do we determine what’s “unfair”?
The answer lies in the conduct standard applied. As our founding editor, Matt Sawchak, and Kip Nelson explain, though, the statute’s conduct standard is “open-ended to the point of dysfunction.” Courts are left to grapple with a list of malleable adjectives, including “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.”
To deal with that open-endedness, courts may “borrow” standards from other areas of the law—like section 5 of the FTC Act. At the extreme end of a “borrowed” standard, a court may find certain conduct to be a per se violation, either where a predicate statute or regulation expressly refers to section 75-1.1 or is effectively “upgraded” to per se status by a court.
Section 75-1.1’s Securities Exemption
Although section 75-1.1 reaches a broad range of trade practices, it does not extend to certain conduct by category. Most notably, section 75-1.1 does not regulate conduct in the employment relationship (Buie v. Daniel International), in shareholder disputes or other affairs internal to a single enterprise (White v. Thompson), or in securities transactions (Skinner v. E.F. Hutton).
Traditionally, the “securities exemption” has rested on two arguments. First, securities transactions are already “subject to pervasive and intricate regulation”—apart from section 75-1.1. Skinner v. E.F. Hutton. Second, a securities transaction is an “extraordinary event” in the life of a business and not the sort of activity that it was “organized to conduct.” HAJMM v. House of Raeford Farms.
Each of these arguments reasons that securities transactions are not “in or affecting commerce,” as that term is used in section 75-1.1(a). This same reasoning has been extended to exempt other pervasively regulated conduct from the statute’s reach.
Robichaud v. Engage2Excel recently applied the securities exemption to dismiss a section 75-1.1 claim. In doing so, the court made an interesting observation about the conduct standards that would apply to the claim if it were allowed to proceed.
Mr. Robichaud worked as a distributor for a company called E2E and acquired shares of E2E stock. When he decided to leave E2E, the company offered him a buyout in exchange for his agreement not to compete. Mr. Robichaud declined. He then started competing directly with E2E.
After Mr. Robichaud’s departure, E2E merged with another company. E2E shares would be extinguished in the merger, so the merger agreement provided a form letter to be sent to E2E’s shareholders. If an E2E shareholder signed the letter and surrendered her shares, she would receive merger consideration—i.e., money.
When E2E sent out the letters, though, it singled out Mr. Robichaud. Every other affected shareholder received the form letter from the merger agreement. Mr. Robichaud, however, received a letter that added non-compete and non-solicitation clauses to that form. When Mr. Robichaud refused to sign, he was left without his money and with, presumably, unmarketable shares.
Being “singled out” in this way seemed unfair to Mr. Robichaud. It did not, however, give rise to a section 75-1.1 claim. The Robichaud court concluded that the claim fell within the well-established securities exemption to the statute. The transactions at issue related to a corporate merger, so this appeared to be a textbook case.
Robichaud discussed the securities exemption’s roots in Skinner and HAJMM. After doing so, however, the court looked at the securities exemption from a different angle:
“The resolution of the [Section 75-1.1] claim requires the Court to determine if Defendants’ actions were unfair or deceptive. To make that determination, the Court will be required to delve into Delaware corporate law along with other related securities laws. Thus, the actions at issue in this case are already subject to ‘pervasive and intricate regulation’ as discussed in Skinner.”
The Relationship Between Pervasively Regulated Conduct and Conduct Standards
In this part of its reasoning, Robichaud focuses not on the “in or affecting commerce” requirement, but rather on the applicable conduct standard. Whether the “actions at issue”—singling out Mr. Robichaud with a different letter agreement—are unfair or deceptive will turn on the corporate and securities laws. In this regard, the court’s discussion of the “pervasive and intricate regulation” more closely resembles a preemption analysis—i.e., the application of one law means that another law cannot apply. (At least one other case has even discussed the “pervasive and intricate regulation” exemption expressly in preemption terms.)
This is not why Skinner and many cases since have considered “pervasive and intricate regulation” to be significant. And, to say that other pervasive regulation can supplant or preempt section 75-1.1 would be a bridge too far—farther than Robichaud ventured.
Nevertheless, Robichaud’s analysis is illuminating. The lesson for litigants? When litigating a section 75-1.1 claim that arises out of regulated conduct, the regulation can be significant for two reasons. First, the regulation may be so “pervasive and intricate” as to take the conduct at issue outside of the statute’s reach. Second, even if the statute applies, the regulation may provide a standard by which that conduct may be considered unfair or deceptive.
Author: Tom Segars