When a claim for violation of N.C. Gen. Stat. § 75-1.1 goes to trial, what analytical framework governs the admissibility of evidence related to that claim?

Today’s post studies a recent decision by Judge Louis A. Bledsoe, III in the North Carolina Business Court that raises this question.

When an Asset Purchase Did Not Materialize, a Lawsuit Did

Insight Health Corporation v. Marquis Diagnostic Imaging of North Carolina concerns a lease agreement for an MRI scanner.

The plaintiff, Insight, provided one of the defendants, Marquis Diagnostic Imaging of North Carolina (MDI), with a scanner, support staff, and related services. In exchange, MDI paid Insight a monthly fee. Insight and MDI entered the agreement in 2012.

Roughly one year later, MDI closed its doors and sold its assets to another company. MDI stopped using the scanner—and stopped paying Insight.

MDI realized $1.15 million from its asset sale. None of that $1.15 million was paid to Insight. Insight then sued MDI for breach of contract and violation of section 75-1.1.

MDI and its co-defendants responded with affirmative defenses and counterclaims related to negotiations between Insight and MDI that predated the 2012 lease agreement. In those negotiations, Insight showed interest in buying MDI’s assets. Negotiations continued through the middle of 2013, but ultimately failed.

MDI characterized the failed negotiations and the 2012 lease agreement as related events. Judge Bledsoe, however, concluded otherwise, and dismissed or entered summary judgment on the defenses and counterclaims related to the failed negotiations.

The case is now headed to a trial set for November 6. In connection with the trial, Insight filed a pretrial motion to bar MDI from introducing evidence or argument about the negotiations that led up to the failed asset purchase.

The Key to Admissibility? The Plaintiff’s 75-1.1 Theory

When it asked Judge Bledsoe to bar evidence of the failed negotiations, Insight relied on Rules 401 and 402 of the Rules of Evidence. Those rules require evidence to be relevant in order to be admissible.

The motion put the ball in MDI’s court. Because the Court had dismissed MDI’s counterclaims and affirmative defenses based on the failed negotiations, what relevance might evidence of the negotiations have on Insight’s claims?

MDI told Judge Bledsoe that evidence of the failed negotiations will give the jury context about MDI’s breach of the MRI agreement.  More specifically, MDI seeks to convince the jury that MDI did not refuse to pay Insight in bad faith, but legitimately thought that it had a legal right not to do so.

MDI offered a second reason, as well: evidence of the negotiations will demonstrate to the jury MDI’s financial condition leading up to MDI’s breach of the MRI agreement.

To assess the admissibility of this evidence, Judge Bledsoe examined each of Insight’s claims—including, and especially, Insight’s claim for violation of section 75-1.1.

In particular, Judge Bledsoe tried to pinpoint the theory behind the 75-1.1 claim.

Judge Bledsoe first referred to the general rule that a defendant’s good faith is not a defense to an alleged violation of section 75-1.1.

Judge Bledsoe then noted that this rule has exceptions. Citing the North Carolina Supreme Court’s 2013 decision in Bumpers v Community Bank of Northern Virginia, Judge Bledsoe observed that section 75-1.1 claims “can be, and are, based upon a wide set of facts and circumstances.”

The spectrum of claims, Judge Bledsoe pointed out, includes theories that make a defendant’s motives relevant. He offered an example to prove the point:

• A contract breach does not violate section 75-1.1—unless it is accompanied by substantial aggravating circumstances.

• Substantial aggravating circumstances can include forged documents, lies, and fraudulent inducement.

• A defendant’s state of mind may be relevant to whether a defendant forged a document or made a misrepresentation.

In sum, a plaintiff can choose a 75-1.1 theory that involves facts about a defendant’s motives. When a plaintiff does so, Judge Bledsoe concluded, a defendant should be allowed to introduce evidence “that tends to show the absence of those same facts.”

Against this backdrop, Judge Bledsoe observed that the theory behind Insight’s section 75-1.1 claim “is not yet concrete.” He also observed that the aspects of the claim that have survived to trial relate to Insight’s breach-of-contract claim. If Insight argues a “substantial aggravating circumstances” theory to support the section 75-1.1 claim at trial—and tries to prove up that theory with evidence of MDI’s improper motive or intent—then MDI should be able to rebut that evidence with evidence of the failed negotiations and failed asset purchase.

Because Insight’s arguments and intentions remain unclear, Judge Bledsoe deferred ruling on admissibility. His opinion, however, forecasted how he will approach evidentiary questions on the 75-1.1 claim at trial.

On the Defendant’s Trial Evidence, Begin with the End in Mind

The Insight decision provides at least two important takeaways for North Carolina business litigators.

First, as always, the theory of a section 75-1.1 claim is central to the claim’s success. Courts consider the taxonomy of 75-1.1 claims—even when litigants do not.

Second, the relevant 75-1.1 theory provides a roadmap not only to the evidence that the plaintiff will need to support the theory, but also to the evidence that might be available to the defendant to disprove the claimant’s evidence.

This means that, if you represent a defendant, discerning a plaintiff’s 75-1.1 theory is a top priority. It also means that, if you represent a plaintiff, careful thinking is warranted to identify precisely what type of evidence you might be putting into issue based on your 75-1.1 theory.

Author: Stephen Feldman