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October 14, 2014 in 75-1.1 Exemptions by

An Embarrassment of Riches: North Carolina Law Review Features Two Articles on Section 75-1.1

The Chief Justice of the United States recently criticized modern law reviews with these memorable words: “Pick up a copy of any law review that you see. The first article is likely to be, you know, the influence of Immanuel Kant on evidentiary approaches in 18th Century Bulgaria or something, which I’m sure was of great interest to the academic [who] wrote it, but isn’t of much help to the bar.”

The North Carolina Law Review has found an effective vaccine against similar criticisms—publishing articles on section 75-1.1. The journal’s latest issue contains not one, but two pieces in this area: an article (by me) on per se violations of section 75-1.1, as well as a student comment on the North Carolina Supreme Court’s decision in Bumpers.

My new article is titled Refining Per Se Unfair Trade Practices. Here’s the abstract:

North Carolina’s “unfair or deceptive acts or practices” statute, section 75-1.1 of the North Carolina General Statutes, is a central feature of North Carolina litigation. The statute allows lucrative remedies, but it defines prohibited conduct with only vague standards. Courts have difficulty applying these standards in any detail, so they often use analytical shortcuts in decisions under the statute.

One key shortcut under section 75-1.1 is the “per se violation.” A per se violation arises when actions that violate a source of law outside section 75-1.1—a different statute, a regulation, or a nonstatutory doctrine—automatically violate section 75-1.1 as well. A per se violation has a transformative effect: in one stroke, it turns a claim for single damages into a claim for treble damages and possible attorney fees.

Courts in section 75-1.1 cases have struggled to decide when to carry out, and when to refuse, this transformation. They have accepted and rejected per se theories with no explanation or with question-begging explanations. They have also sidestepped the problems with a per se theory by applying a number of variations on per se theories. This variety of approaches leaves courts and lawyers to guess at what analysis to apply in future cases.

The courts can end this confusion by sharpening the per se theory and replacing parts of it. In many instances, the General Assembly has announced, directly or indirectly, that a violation of a given statute is also a violation of section 75-1.1. Courts should continue to apply these per se violations. In all other cases, however, courts should ask whether the conduct that makes up a separate violation satisfies the tests for unfairness under section 75-1.1. The tests for unfairness already address violations of separate statutes and other expressions of public policy. This streamlined approach will strengthen the analysis of per se and non-per-se violations alike.

The same issue of the North Carolina Law Review includes a student comment by Rebecca Fiss, a 2014 UNC graduate who’s now clerking on the U.S. Bankruptcy Court for the Middle District of North Carolina. The comment describes and critiques the North Carolina Supreme Court’s decision in Bumpers v. Community Bank—a decision that we’ve discussed earlier on this blog. Here is most of the introduction to Ms. Fiss’s comment (footnotes deleted):

North Carolina consumers gained the ability to sue for “unfair or deceptive acts or practices” in 1969, when the state adopted a model version of the Unfair Trade Practices and Consumer Protection Law promoted by the Federal Trade Commission. Eight years later, the Supreme Court of North Carolina held that the original version of the statute covered only “bargain, sale, barter, exchange[,] or traffic” in goods and thus did not reach abusive debt collection practices. The North Carolina General Assembly promptly amended the statute to broadly include “all business practices, however denominated.” Since then, unfair or deceptive acts or practices (“UDAP”) claims have become a frequently used litigation tool, amounting to a “boilerplate claim” in almost every commercial or consumer transaction-based complaint in the state.

Around 2007, the national swell in foreclosure rates and the resulting crash of the subprime mortgage market brought public attention to the specific consumer problem of predatory mortgage lending. State legislators around the country realized that the business structures of subprime lenders incentivized lenders to offer their products to high numbers of low-credit borrowers and to ignore existing consumer protection laws. Even before the mortgage crisis, however, North Carolina was already on the forefront of borrower protection: North Carolina passed the nation’s first state predatory lending law in 1999 and has since repeatedly expressed strong legislative intent to protect consumers in the mortgage context.

Despite North Carolina’s growing repertoire of mortgage-specific statutes, some borrowers still rely on N.C. Gen. Stat. § 75-1.1, the state’s general UDAP statute, to contest unethical lending practices that slip through the cracks. To decide what types of conduct fall within the broad prohibition of section 75-1.1, courts often look to the statute’s purpose. As the General Assembly articulated in the original version of section 75-1.1, “[t]he purpose of this section is to declare, and to provide civil legal means to maintain, ethical standards of dealings . . . between persons engaged in business and the consuming public within this State to the end that good faith and fair dealings between buyers and sellers at all level[s] of commerce be had in this State.” The courts have expounded on that purpose, emphasizing that the statute was created because common law remedies—like fraud suits—proved insufficient to protect the interests of consumers.

Because the statute was created to protect consumers from a broad range of abuses, the Supreme Court of North Carolina and consumer advocates have emphasized the importance of allowing consumers to bring actions under section 75-1.1. Without the help of ground-level enforcement by individuals, state consumer protection agencies are hard-pressed to keep up with the ingenuity and volume of merchants looking for new ways to bilk consumers. However, advocates have also recognized the ability of judicial interpretation to undermine the effectiveness of UDAP statutes by making it more difficult for consumers to successfully bring suits.

The Supreme Court of North Carolina has taken a large step in that direction in Bumpers v. Community Bank of Northern Virginia. In Bumpers, two borrowers alleged that the bank that provided their second mortgage loans charged them for something they never received—specifically, a “loan discount fee” without a discounted interest rate. The court of appeals affirmed summary judgment in the plaintiffs’ favor, but the supreme court reversed, holding that the plaintiffs had alleged deception and thus had to prove they had actually and reasonably relied on the bank’s “misrepresentation” that they had received a discount.

The majority’s approach has two princip[al] flaws. First, after characterizing the plaintiffs’ claims as alleging misrepresentation by the defendants, the court added an inappropriate new element to deception-based claims: consumers alleging deceptive trade practices under section 75-1.1 must now prove reasonable reliance, an element traditionally associated with fraud. By demanding that consumers prove reasonable reliance, the Supreme Court of North Carolina has undermined the consumer-oriented purpose of section 75-1.1 and cleared the way for exploitation of consumers’ knowledge gaps. Second, the court failed to question whether the defendants’ alleged actions might alternatively violate the unfair trade practices prong of section 75-1.1. By failing to make this inquiry, the supreme court opened the door for defendants to escape liability for unscrupulous business practices merely by reframing a plaintiff’s claim.

Whether you agree or disagree with Ms. Fiss’s perspective, she deserves praise for contributing to the discussion on the scope of section 75-1.1.

At a recent debate among candidates for the North Carolina Supreme Court, one of the candidates cited Bumpers, and how candidates would rule in similar cases, as a meaningful issue in the race. If so, the new issue of the North Carolina Law Review should see a lot of downloads over the next few weeks.

What do you think of these articles?  Please tell us in the comments.

Author: Matt Sawchak