The “Regrettable Trend” of Including Section 75-1.1 Claims in Cases Involving Internal Business Disputes
Ellis & Winters
While N.C. Gen. Stat. § 75-1.1 reaches any action “in or affecting commerce,” there are several limitations to its reach. One such limitation is the internal business dispute exemption, which prevents claims that arise solely within a single market participant. This exemption has been a frequent focus of our previous posts. We have explored several cases that involved the sometimes murky distinction between internal disputes and disputes that impact other market participants.
This post will examine a much easier call where there was little question that the exemption should apply. In Brewster v. Powell Bail Bonding, Inc., Judge Adam R. Conrad of the North Carolina Business Court dismissed a 75-1.1 claim premised entirely on internal operations of a business.
In dismissing that claim, however, Judge Conrad included a warning to future litigants about the frequent misuse of section 75-1.1 in the context of an internal business dispute.
When Bounty Hunting Goes Bad
Raul S. Brewster was a minority shareholder of Powell Bail Bonding, Inc. Brewster was initially hired as a recovery agent, which involved hunting down bail skippers. Apparently, Brewster was good at his job. In 2005, he was promoted to “2nd Vice President” and took a twenty percent equity share of the company.
When Brewster was promoted, several new directors also joined the company. According to Brewster, over the next decade the new directors created a “hostile” work environment and excluded him from important company matters.
By September 2015, Brewster had grown tired of these problems. He wrote a letter to the company, outlining his concerns and announcing his intent to divest his equity stake in the company.
Brewster alleged that he was then terminated from the company. Shortly after the termination, the company called a special shareholders meeting but excluded Brewster. At the meeting, new directors were elected and new corporate documents were approved. Brewster believed the new documents were created to diminish his rights as a minority shareholder.
Brewster sued the company and the new directors. In addition to seeking dissolution of the company, Brewster brought claims for breach of fiduciary duty and violation of section 75-1.1.
The company moved to dismiss.
Judge Conrad Dismisses the Section 75-1.1 Claim
Judge Conrad allowed the breach of fiduciary duty claim to proceed to discovery. Brewster alleged that the new directors acted in concert to exclude him. Those allegations, Judge Conrad found, were sufficient to state a claim that the new directors owed a fiduciary duty to Brewster.
But Judge Conrad was having none of the 75-1.1 claim.
Brewster based his 75-1.1 claim on allegations that the company had obscured its bylaws, dissipated company assets, improperly terminated his employment, and prevented him from accessing the company’s financial records.
On these allegations, it is no surprise that Judge Conrad found that the internal business dispute exemption applied. Judge Conrad dismissed the 75-1.1 claim, noting that the complaint described a “classic shareholder dispute,” which has “nothing to do with the type of unfair market conduct section 75-1.1 was designed to address.”
Judge Conrad then took the opportunity to highlight what he described as a “regrettable trend in North Carolina business litigation.” In 2010, he observed, the North Carolina Supreme Court had described the contours of the internal business dispute exemption in White v. Thompson. Judge Conrad identified more than a dozen business court cases since White that involved 75-1.1 claims that arose within the context of a single business.
Judge Conrad highlighted the inefficiencies created by plaintiffs’ making these claims. He also highlighted the fee-shifting provision of section 75-16.1. His warning to litigants is worthy of re-printing in full here:
By now, the message should be clear: section 75-1.1 plays no role in resolving these internal corporate disputes. Yet time and time again, section 75-1.1 appears where it does not belong, with consequences that are significant and unhealthy. The routine addition of section 75-1.1 claims in these cases invites avoidable motions practice—driving up the cost of litigation, taxing the resources of the Court, and exposing the plaintiff to a potential award of attorney fees under section 75-16.1. It also impedes settlement discussions by introducing remedies (including treble damages) that would otherwise be unavailable, thereby distorting the parties’ incentives and their perceived risks. It is no surprise then that courts strive to keep section 75-1.1 (along with its promise of extraordinary damages) within its proper legal bounds.
Future Disgruntled Shareholders Should Proceed with Caution
Judge Conrad’s decision in Brewster was no surprise: Brewster’s allegations fell squarely within the internal business dispute exemption.
But as Judge Conrad’s opinion makes clear, future litigants should think twice about the routine inclusion of section 75-1.1 claims in cases involving internal business disputes. The temptation to do so can be strong: after all, section 75-1.1 offers a plaintiff the chance to recover treble damages and attorney fees. But Judge Conrad’s specific reference to the other side of section 75-16.1—which allows a defendant to recover its fees for “frivolous and malicious” 75-1.1 claims—shows the other side of the coin. Brewster could be read to suggest that including 75-1.1 claims in actions that stem from clearly internal business disputes may meet that standard, and that plaintiffs who plead these claims do so at their own peril.
Author: Jeremy Falcone