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July 12, 2016 in 75-1.1 Exemptions by

A Quirky Exemption: “Internal” Business Disputes

A recent decision by the North Carolina Business Court highlights an
important—and counterintuitive—limit on the scope of N.C. Gen. Stat. § 75-1.1.

Section 75-1.1 says expressly that it applies to practices “in or affecting commerce.” Courts have interpreted this phrase as narrowing the fact patterns that the statute covers. The employment exemption, for example, emanates from this phrase.

Another “commerce”-based exemption involves disputes between owners, officers, or directors of a single business. Under this exemption, when a 75-1.1 claim turns on finger-pointing within an organization, the claim falls outside the scope of the statute.

In RCJJ, LLC v. RCWIL Enterprises, LLC, the Business Court addressed an important question on this exemption:  Can a party sidestep the exemption by alleging that the corporate infighting also involved competition?

The Bad Breakup of Do Good

Ryan Crecelius and Jonathan Jackson were the principals of Do Good Real Estate, a real-estate brokerage firm. When they started the company, Crecelius and Jackson signed an operating agreement. The agreement included non-compete and non-solicitation clauses.

The company’s good vibes turned sour. Crecelius and Jackson didn’t see eye to eye, so they negotiated a buyout of Crecelius’s interest in Do Good.

During the buyout negotiations, though, Crecelius was planning his next business venture.

One day after he and Jackson agreed in principle on the buyout, Crecelius formed a new company called Nest Realty. The new company started its operations shortly after the ink dried on the buyout agreement.

During the same period, and unbeknownst to Jackson, Crecelius helped himself to Do Good’s customer database.

When Jackson found out, he sued Crecelius and Nest. Jackson’s amended complaint raised thirteen different claims, including an alleged violation of section 75-1.1.

After a year of discovery, Crecelius and Nest filed a motion for summary judgment on all claims.

On the section 75-1.1 claim, Crecelius and Nest argued that their allegedly wrongful acts were not “in or affecting commerce” because they involved “the internal conduct of individuals within a single business.”

Jackson disagreed. He argued that Crecelius committed his wrongful acts as a competitor, not as an owner of Do Good. On this logic, the 75-1.1 claim involved competition between two businesses, not just conduct within a single business.

Business Court Judge Gregory McGuire decided the motion on June 20.

When Competitive Acts Are Internal in Nature

Judge McGuire’s decision—like the parties’ briefs—focused on the North Carolina Supreme Court’s 2010 decision in White v. Thompson.

In White, one of three business partners formed a new, separate company that steered work and payments away from the partnership. The Supreme Court decided that the departing partner’s conduct was exempt from section 75-1.1 because the conduct “occurred completely within” the partnership. Section 75-1.1, the Supreme Court held, does not apply to intra-business conduct.

Judge McGuire applied White to Jackson’s 75-1.1 claim. That claim, Judge McGuire concluded, was limited to Crecelius’s interactions with Do Good and Jackson—actions that count as intra-business conduct under White. Thus, that conduct was not “in or affecting commerce.”

What, though, about Jackson’s argument that Crecelius was acting as a competitor of Do Good and as an agent of Nest, so that Crecelius’s conduct involved more than a single business?

To answer that question, Judge McGuire pointed back to White. When the defendant in White diverted work and payments from his partners, he did so to benefit his new, competing business. Given that feature of White, Judge McGuire held that crediting Jackson’s competitor/agent argument would eviscerate the holding in White.

Based on these concerns, Judge McGuire granted summary judgment to Crecelius and Nest on Jackson’s 75-1.1 claim.

Distinguishing White

Business litigators in North Carolina would be wise to study RCJJ, LLC.

Many complex business disputes involve some type of business divorce. As RCJJ, LLC shows, a plaintiff in a business-divorce case cannot just tack a section 75-1.1 claim onto the end of a complaint and assume that the claim will rise or fall with other business torts alleged there. If the complaint involves internal bickering related to the business divorce, the section 75-1.1 claim might well fail as a matter of law.

The key for such a plaintiff is to identify truly external conduct that violates section 75-1.1. To stay out of the vortex of White, moreover, that external conduct will have to involve something more than competition with the defendant’s former business. Identifying and describing that conduct will require careful thought and precise wording.

This careful styling of a 75-1.1 claim might sound like a lot of work, but treble damages provide a strong incentive. As RCJJ, LLC makes clear, those treble damages do not apply to White lies.

Author: Stephen Feldman