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Paper Airplanes and Passing Notes: Sending a Complaint to Industry Contacts Lands a Section 75-1.1 Claim

Ellis Winters

Ellis & Winters

In this week’s post, we’re taking a trip across the country to see how a federal court in Utah applied section 75-1.1. We’ve previously written about how courts outside of North Carolina interpret section 75-1.1, like this one in California, or this one in Massachusetts.

Last month, the U.S. District Court for the District of Utah recognized a section 75-1.1 claim in John Bean Technologies Co. v. B GSE Group, LLC. After the plaintiff filed this suit in Utah, the plaintiff sent its complaint with a cover letter to its business contacts in North Carolina, where the defendant is located. The District of Utah allowed a section 75-1.1 counterclaim based on the plaintiff’s behavior to survive summary judgment, even though the Court granted summary judgment on counterclaims for defamation and negligent misrepresentation.

Fasten Your Seatbelts

Plaintiff JBT and defendant BGSE are two competing businesses in the aviation industry that provide equipment to the military for F-35 aircraft hangars.

In 2011, JBT hired Bryan Bullerdick, a North Carolina resident, as a sales manager for F-35 hangar equipment. In 2014, Bullerdick left JBT and became a majority shareholder of BGSE, a North Carolina limited liability company. At first, it was a smooth departure. JBT and BGSE entered into a distributorship agreement that lasted for a year. Under that agreement, BGSE acted as JBT’s designated distributor of ground support for F-35 hangars. After the one-year agreement ended, BGSE continued to sell JBT’s ground-support equipment.

The relationship between JBT and BGSE encountered turbulence when Bullerdick told his aviation industry contacts that BGSE had designed JBT’s products. He also gave JBT’s proprietary information to a competitor to help develop a competing product. Eventually, BGSE began competing directly with JBT. BGSE also began passing off JBT products by removing JBT identifiers and replacing them with BGSE identifiers.

How Did We End Up in Utah?

JBT filed a lawsuit in the District of Utah against BGSE and Bullerdick based on this conduct. JBT alleged claims for misappropriation of trade secrets, Lanham Act violations, and breach of contract. JBT filed the complaint in Utah because a division of its company is based in Utah, both parties sell products in Utah, and some of the alleged events occurred in Utah. Thus, Utah was a good venue for the lawsuit.

After filing suit, however, JBT sent copies of the filed complaint and a cover letter to its business contacts in North Carolina—the state where BGSE is based. JBT’s cover letter emphasized that JBT equipment was designed and developed solely by JBT, and made two additional statements:

  • that although BGSE initially had served as a JBT distributor, BGSE had not sold any of JBT’s products since that arrangement ended; and
  • that JBT was the sole point of contact for customer-support issues, to the exclusion of other suppliers.

After JBT sent the cover letter and complaint, BGSE and Bullerdick counterclaimed, alleging that the cover letter supported claims for defamation, negligent misrepresentation, and unfair trade practices.

Even though JBT’s suit had been filed in Utah, the conduct at issue involved communications sent to individuals in North Carolina. Thus, although Utah law governed JBT’s claims against BGSE, the parties agreed that North Carolina substantive law applied to BGSE’s counterclaims. Although the court did not address its reason for applying North Carolina law, Utah courts apply the most significant relationship test, and the conduct at issue likely had the most significant relationship with North Carolina. That’s how this section 75-1.1 claim ended up in the District of Utah.

A Rough Landing for JBT

The court applied North Carolina law to three of BGSE’s counterclaims: (1) negligent misrepresentation; (2) defamation; and (3) violation of section 75-1.1.

The court granted summary judgment on BGSE’s negligent-misrepresentation claim because it held that JBT owed no duty to BGSE at the time that the alleged misrepresentation occurred.

The court also granted summary judgment on the defamation claim. First, the court noted that BGSE had not provided evidence of special damages or claimed the supposedly defamatory statements were susceptible of two meanings. Therefore, the court analyzed the claim under a libel per se theory. The court concluded that the statements in the cover letter did not meet the requirements of libel per se. The first statement—that BGSE sold no JBT products after its distributor relationship ended—did not subject BGSE to “ridicule, contempt, or disgrace,” as required under North Carolina law. The second statement—that JBT was the only point of contact for support issues concerning its products—did not mention BGSE at all. For these reasons, the court granted summary judgment to JBT on BGSE’s defamation claim.

BGSE’s section 75-1.1 claim was partly premised on its other tort claims; after all, a successful claim for negligent misrepresentation or defamation may form the predicate for a section 75-1.1 claim. Because the court granted summary judgment on those tort claims, JBT contended that the section 75-1.1 claim could not stand.

BGSE, however, argued that its section 75-1.1 claim could survive independently of its negligent misrepresentation and defamation claims. BGSE asserted that it had forecasted evidence that JBT knowingly made false statements for the purpose of driving business away from its competitor.

The court accepted this argument and concluded that sending the cover letter qualified as a deceptive act under section 75-1.1 for two reasons. First, a witness had admitted that the first statement in the cover letter was untrue, because BGSE had sold JBT’s equipment after the distribution agreement ended. Second, part of the second statement was false because a customer could call BGSE (a supplier) directly if an issue arose under BGSE’s warranty; thus, the statement that JBT was the “sole” point of contact for customer-support issues was not true.

Notably, this decision allowed a section 75-1.1 claim premised on allegedly defamatory conduct to proceed, even though that same conduct could not support a defamation claim. Per se defamation claims—like the claim asserted by BGSE—entitle a claimant to presumed damages, but have a higher bar for liability, as only certain types of false statements can support per se liability. Per quod defamation claims, on the other hand, lower the liability bar, allowing recovery for a broader spectrum of false statements, but require claimants to allege special damages in detail at the pleading stage. Moreover, defamation law offers certain defenses, such as qualified privilege, that could have also shielded JBT from liability. Put simply, defamation law outlines the boundaries of when allegedly false statements should be legally actionable. In this case, BGSE’s evidence fell outside of those boundaries.

Because JBT’s motion relied on the theory that it did not commit a deceptive act, the Court denied the motion. However, JBT did not move for summary judgment based on BGSE’s failure to prove causation, so the court did not have the opportunity to determine whether JBT’s actions had actually caused BGSE any injury. Despite upholding the section 75-1.1 claim, the court noted that BGSE still had an “uphill battle” to prove that the “relatively benign misstatements” caused injury to BGSE.

Section 75-1.1 Can Fly Solo

John Bean is a good reminder that even where deceptive acts may not support claims for negligent misrepresentation or defamation, they can lead to liability under section 75-1.1. Even though BGSE was not allowed to recover under defamation law, a question remains as to whether JBT will be able to rely on defamation defenses with respect to BGSE’s section 75-1.1 counterclaim. These questions may be answered as John Bean proceeds. At this point, however, John Bean suggests that a claimant can use section 75-1.1 as an end-run around defamation law.

John Bean also serves as a cautionary tale to businesses who might seek to gain an advantage in the marketplace by publicizing commentaries on legal complaints against their competitors. Unless the statements are unquestionably accurate, it may be best for these types of communications to stay grounded.

Author: Preetha Suresh Rini

September 22, 2020
Posted in  Choice of Law Misrepresentations Other 75-1.1 Issues