The Plaintiff or Defendant Is Not from North Carolina. Does Section 75-1.1 Apply?
Ellis & Winters
N.C. Gen. Stat. § 75-1.1 regulates conduct “in or affecting commerce.” The statute doesn’t expressly differentiate based on type of commerce—intrastate versus interstate.
When conduct involves parties both inside and outside North Carolina, however, the reach of section 75-1.1 can come into question. Only a few months ago, we reviewed a federal-court decision that described the different choice-of-law tests that courts have used when considering whether section 75-1.1 applies to multistate conduct.
The North Carolina Business Court recently issued another decision on the standards that govern whether a party from outside of North Carolina can raise a section 75-1.1 claim.
In Window World of Baton Rouge, LLC v. Window World, Inc., Judge Louis A. Bledsoe, III refused to dismiss a section 75-1.1 claim that the defendant argued was barred by choice-of-law principles. More specifically, the defendant argued that section 75-1.1 did not apply to the defendant’s conduct because no plaintiff had a home office in North Carolina.
How did Judge Bledsoe reach this conclusion? This post examines the decision.
A Window into a Franchise Dispute
The plaintiffs in Window World are franchisees of Window World, Inc. Window World is based in North Carolina.
The complaint accuses Window World—as franchisor—of committing a host of wrongs. Certain plaintiffs complained to Window World about these wrongs and appeared to reach a settlement with Window World, but Window World reneged.
This lawsuit followed. The complaint contains the usual assortment of contract claims, business torts, and an alleged violation of section 75-1.1.
The plaintiffs sued multiple defendants, including Tammy Whitworth, whose family once owned all outstanding shares of Window World’s stock, and against whom the plaintiffs seek to pierce the corporate veil.
Ms. Whitworth filed a motion to dismiss. On the section 75-1.1 claim, Ms. Whitworth argued that the plaintiffs have not stated a cognizable claim because the plaintiffs have not alleged an in-state injury.
Mapping Out the Place of the Injury
Judge Bledsoe began his analysis of Ms. Whitworth’s argument by identifying the controlling choice-of-law rule.
Under decisions of the North Carolina Supreme Court, he explained, the law of the situs of the claim determines the applicable law for matters that affect the parties’ substantial rights. For tort claims, the situs of the claim is “the state where the injury occurred.”
How does a court determine where an injury occurs?
To answer that question, Judge Bledsoe drilled down on the specific choice-of-law rule that applies to alleged violations of section 75-1.1.
Just two months ago, in a decision called Soma Tech, Inc. v. Dalamagas, Judge Bledsoe concluded that the North Carolina Supreme Court would likely apply the lex loci rule to section 75-1.1 claims. The alternative rule would be the most-significant-relationship test, but, as Judge Bledsoe noted, the state Supreme Court has rejected the modern trend toward that test.
Under lex loci, the plaintiff is considered to have sustained his injury in the state where the last act occurred that gave rise to the injury.
This rule might sound straightforward, but the parties had competing arguments about how it applies:
- Ms. Whitworth argued that because the plaintiffs are not located in North Carolina, they could not have been injured in North Carolina.
- In response, the plaintiffs argued that they were injured in North Carolina. More specifically, they argued that the injury occurred when Window World—located in North Carolina—received kickbacks and other information that the law compelled them to disclose to the plaintiffs.
To evaluate these arguments, Judge Bledsoe turned to a 2010 decision of the North Carolina Court of Appeals called Harco National Insurance Company v. Grant Thornton LLP. In Harco, the Court of Appeals held that the location of a plaintiff’s business may be useful in determining whether a plaintiff suffered injury—but only if, “after a rigorous analysis, the place of injury is difficult or impossible to discern.”
In most cases, the Court of Appeals emphasized, “a plaintiff has clearly suffered its pecuniary loss in a particular state, irrespective of that plaintiff’s residence or principal place of business.” In those cases, lex loci applies, and the governing law is the law of the state where the plaintiff has actually suffered harm.
Judge Bledsoe then applied these teachings to the motion to dismiss.
In her motion, Ms. Whitworth made only a bare assertion that the plaintiffs “are not located in, and did not suffer injury in, North Carolina.” As Harco makes clear, the location of a plaintiff’s business does not exclusively determine where the plaintiff suffered injury. That determination depends on the facts of each case.
Here, the plaintiffs have alleged that they suffered an injury in North Carolina, based on Window World’s conduct and its acceptance of kickbacks. These allegations, viewed in the light most favorable to the plaintiffs, could not be interpreted to establish injury somewhere other than North Carolina, as Ms. Whitworth had argued.
Judge Bledsoe therefore denied the motion.
The Place of Injury and Section 75-1.1 Claims
Because section 75-1.1 claims are ubiquitous in North Carolina business litigation, one can easily overlook the question of whether section 75-1.1 applies when the plaintiff or defendant is not from North Carolina. This is an important question to answer.
The answer, moreover, can require careful analysis of the allegations and facts of each case. As Window World clarifies, the location of the plaintiff’s business does not automatically supply the answer.
Window World also illustrates two other tactical considerations in section 75-1.1 litigation:
- A challenge at the pleadings stage to the application of section 75-1.1 must take into account not only the relevant choice-of-law regime, but also the Rule 12(b)(6) standard; and
- In anticipation of a Rule 12(b)(6) fight, a plaintiff with a section 75-1.1 claim would benefit from including allegations in the complaint that concern the location of the plaintiff’s injury.
In the end, choice-of-law issues can be thorny in any type of litigation. This can be especially true—as Window World reminds us—in section 75-1.1 litigation.
Author: Stephen Feldman