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October 11, 2016 in 75-1.1 Exemptions by

Practical Guidance for Framing an Unfair-Trade-Practices Claim

A recent decision from a North Carolina federal court underscores the importance of how a plaintiff frames an alleged violation of N.C. Gen. Stat. § 75-1.1.

In Hongda Chemical USA, LLC v. Shangyu Sunfit Chemical Co., Judge N. Carlton Tilley Jr. of the U.S. District Court for the Middle District of North Carolina considered a motion to dismiss a section 75-1.1 claim. The claim involved a contract. As we have seen, when a 75-1.1 claim involves a contract, the claim usually faces substantial hurdles, even at the pleadings stage.

In Hongda, however, the court denied the motion to dismiss. Why?

The court seems to have interpreted the claim as one partially based on a misrepresentation and partially based on direct unfairness. This characterization matters, especially because unfairness is potentially the broadest category of section 75-1.1 claims.

This post examines the section 75-1.1 claim in Hongda, the court’s decision, and the lessons that the case offers for litigants under section 75-1.1.

A Contract to Deceive

This heading might sound like the title of a bad James Bond movie, but it aptly describes the allegations in Hongda.

Hongda and Sunfit entered into a contract for the sale of NBPT, a chemical product. Under the contract, Hongda agreed to buy NBPT exclusively from Sunfit and to sell no other NBPT.

Hongda, however, had no intent to honor the agreement. Its managing members had conspired to create a competing venture that would manufacture and sell NBPT. The members planned to use the proceeds of Hongda’s sales of Sunfit NBPT to build the competing entity, instead of using those proceeds to pay Sunfit.

The members followed through on the plan. When Sunfit asked why it wasn’t getting paid, the Hongda conspirators lied: they told Sunfit that Hongda’s buyer hadn’t paid Hongda, so Hongda had no funds to pay to Sunfit.

Despite these facts, Hongda, rather than Sunfit, began the litigation by seeking a declaratory judgment. Sunfit responded with counterclaims, as well as third-party claims against Hondga’s members who had helped create the competing venture. The third-party claims included a claim under section 75-1.1.

When a Claim About a Contract Is Not a Contract-Based Claim

The Hongda members—the third-party defendants—moved to dismiss the section 75-1.1 claim.

In their briefing, the Hongda members framed the 75-1.1 claim as one alleging an intentional breach of contract. According to the members, the crux of the case was Hongda’s agreement to buy and sell NBPT exclusively from Sunfit. The members argued that even if Hongda didn’t fulfill its contract obligations, Sunfit should be limited to contract remedies against Hongda, not treble damages against Hongda’s members.

Sunfit, however, had potent counterpoints.

First, the Hongda members weren’t being sued over contract obligations, because they weren’t parties to the contract at issue. A section 75-1.1 claimant must show “substantial aggravating circumstances” only in a certain situation: when a claim is premised on a breach of contract. Although the Hongda members might have encouraged a breach of contract, they committed no breach themselves.

Second, the third-party complaint alleges that the members conducted their scheme in secret and, on top of that, lied to Sunfit. Thus, even if Sunfit were required to allege “substantial aggravating circumstances,” Sunfit alleged those circumstances: concealment and deception. As we have shown before, deception is usually a key ingredient in the recipe for substantial aggravating circumstances.

The court focused on both of these points.

It framed the section 75-1.1 claim not as an intentional-breach claim, but as a misrepresentation-based claim—with the misrepresentation being one by an individual Hongda member, not one by Hongda itself, the contracting party. The court specifically noted that Sunfit had alleged actual reliance, though the court’s order did not address whether that reliance was reasonable. Nor did the court address whether the claim was pleaded with particularity.

The court then described the conduct at issue as “unscrupulous” and “unethical.” Through this language, the court channeled Sunfit’s claim into the category of direct unfairness. This characterization had a big benefit for Sunfit: the claim satisfied the relatively open-textured standards that govern direct-unfairness claims.

Points for 75-1.1 Litigants

Hongda shows vividly why the framing of a 75-1.1 claim can make the difference between survival and dismissal. In particular:

  • Framing a 75-1.1 claim as a direct-unfairness claim increases the claim’s chances of surviving a motion to dismiss.
  • To maximize prospects under section 75-1.1, a plaintiff might consider focusing its claim on the bad conduct of third parties, not the conduct of contracting parties.
  • Even a misrepresentation-based claim—if it includes the required elements—might have better odds of surviving a motion to dismiss than a “substantial aggravating circumstances” claim would have.

Hongda shows that the survival of a 75-1.1 claim might turn on whether the claimant holds the claim at just the right angle.

Author: Stephen Feldman