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A North Carolina Federal Court Weighs in on Choice-of-Law in Unfair and Deceptive Claims

Ellis Winters

Ellis & Winters

As we have previously explored, North Carolina’s choice-of-law rule for multi-state unfair and deceptive trade practice cases remains unsettled.

Some courts have applied a “most significant relationship” test while others have applied a “place of injury” or “lex loci” test to assess which state’s law to apply. The North Carolina Supreme Court has not yet weighed in on the specific issue.

In Cargill Inc. v. WDS Inc., the United States District Court for the Western District of North Carolina determined that the lex loci test applied. The Court went on to suggest that the place where the last act occurred that caused the injury was extremely important, if not dispositive, in determining the place of injury.

The Court’s decision had major implications in the case. By determining that North Carolina law applied, the Court opened the door to the trebling of a $35 million jury verdict against the defendants.

The Jury Awards $35 million for Overcharges and Fraudulent Billing

Cargill is a global food producer and is the largest privately held corporation in the United States. Cargill is headquartered in Minnesota and incorporated in Delaware. 

WDS provides warehousing and distribution services to companies.  Specifically, WDS provides warehouse storage and sells related products, such as packaging and labels, to producers like Cargill. WDS is both headquartered and incorporated in North Carolina, but maintain operations throughout the country.

Cargill and one of its wholly owned subsidiaries maintained a contractual relationship with WDS, Inc.  Cargill and WDS entered into a Select Supplier Agreement.  That agreement set a fixed margin for the products that WDS sold to Cargill.

WDS would issue purchase orders to Cargill, and Cargill would pay WDS in accordance with the purchase orders.

At some point in their business relationship, Cargill came to believe that WDS was inflating the margins on the products that WDS provided.

Cargill and its subsidiary sued WDS and its two owners in federal court in the Western District of North Carolina. Cargill alleged that WDS had breached its agreements with Cargill. Cargill also asserted fraud and other tort claims related to the defendants allegedly defrauding and making misrepresentations to Cargill regarding the margins that it was charging. Cargill also asserted a claim under N.C. Gen. Stat. § 75.1.1 for the same conduct.

After a seven-day trial, a jury returned a verdict against WDS for breach of contract and against all of the defendants for fraud and related misrepresentations.

The jury expressly found that the defendants made multiple misrepresentations to Cargill regarding the margins that WDS was charging and also falsified business records to further the misrepresentations.

The jury concluded that Cargill was entitled to recover $35,177,269 in single damages.

After the jury announced its verdict, the Court entertained multiple post-trial motions from both the plaintiffs and the defendants. Among their pretrial motions, the defendants contended that they were entitled to judgment as a matter of law on the 75-1.1 claim because North Carolina law did not apply.

The Court also accepted briefing from the parties to consider whether the findings of the jury supported Cargill’s 75-1.1 claim and, by extension, trebling the damages awarded.

The Federal Court Determines that North Carolina Law Applies

As to the defendants’ choice-of-law challenge, the Court first noted that the federal court must use the conflict-of-laws rules of the state in which the federal court is sitting. Citing a North Carolina Court of Appeals case, Harco National Insurance Co. v. Grant Thornton LLP, the Court determined that the place-of-injury test was the test North Carolina court would apply to determine applicable law. Applying the test from that appellate decision, the Court indicated that the place of injury in this context was the place where the party “in fact sustained its alleged injury.” The Court also noted that the “in fact” place of injury is not necessarily the place that the plaintiff is incorporated. Again following the standard set out in Harco, the Court instead pronounced that the place of injury was where the “last act” occurred that gave rise to the injury.

The plaintiffs presented evidence that payments of the purchase orders that contained overcharges were made to WDS at a North Carolina address and that WDS was a North Carolina corporation. The Court determined that the plaintiffs’ injury occurred when WDS received payment in North Carolina.  Because payment was the last act to occur, the injury occurred in North Carolina, and North Carolina law applied

On that basis, the Court rejected the defendants’ motion for judgment on the section 75-1.1 claim as a matter of law. The Court went on to determine that the jury’s findings concerning the defendants’ fraud and misrepresentations also constituted conduct that was both unfair and deceptive.  The defendants were therefore liable under section 75-1.1, and the Court trebled the jury’s $35 million award.

Place where Payment Received as Place where Injury Occurred

Although several North Carolina courts have applied the lex loci rule to determine which state’s law to apply for unfair and deceptive trade practice claim, the Court’s determination that the place of injury was where the defendant received payment has broad implications.  Although all choice-of-law inquiries are fact-specific, it is likely that North Carolina law, and section 75-1.1 by extension, would apply in most cases that involve claims related to allegedly improper sales charges where the defendant received payment in North Carolina. Companies that receive payments in North Carolina should be guided accordingly.

Author: George Sanderson

April 10, 2018
Posted in  Choice of Law