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Similar Theories Lead to Different Results (Including a $31.9 Million Judgment), Illustrating the Importance of Categorizing Section 75-1.1 Claims

As we’ve previously explained, section 75-1.1 claims for unfair or deceptive trade practices typically fall into five discrete categories. Categorizing claims is not always simple, but it can have colossal consequences.

Today’s post examines two cases with three section 75-1.1 claims. Those claims share similar factual theories but resulted in vastly different outcomes. One claim was partially dismissed and significantly limited, another survived summary judgment only to be dismissed at trial, and the third resulted in an eight-figure judgment.

Claim categorization may explain these different results. The partially dismissed, limited claim fell into the deceptive-conduct category, which triggered heightened pleading standards and additional hurdles to prove liability.

The claims that made it to trial likely fell into the “pure” or “direct” unfairness category. Unfairness claims are particularly potent because of vague, flexible liability standards. Courts often define unfair practices as “offending established public policy,” being “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers,” or amounting “to an inequitable assertion of power or position.” Unfairness claims also face fewer obstacles to liability than other types of section 75-1.1 claims, particularly those that directly rely on deceptive conduct or involve a breach of contract.

Vitaform, Inc. v. Aeroflow, Inc.

Vitaform v. Aeroflow is a commercial dispute in the North Carolina Business Court pending before Chief Judge Louis Bledsoe. Vitaform, which does business as Body After Baby, designed and manufactured compression garments intended to address post-delivery medical conditions frequently faced by new mothers. Body After Baby’s products often qualified as durable medical equipment (DME) that was reimbursed by health insurers.

To expand its market presence, Body After Baby sought to sell its products through existing distribution channels for breast pumps, another important post-partum DME product. Enter Aeroflow, a national distributor of breast pumps.

In July 2018, a senior Aeroflow employee called Body After Baby’s founder to discuss partnering to open new markets for Body After Baby’s compression garments. Body After Baby claims that it reached an oral agreement with Aeroflow during the phone call to do just that.

Under that agreement, Body After Baby would provide its product designs, images, sizing charts, and descriptions, as well as its know-how on getting health insurers to pay for the compression garments as DME. Aeroflow would sell the garments through its existing distribution channels and handle the nuts and bolts of product sales and insurance claims. During the July 2018 call, Aeroflow’s employee allegedly promised to keep Body After Baby’s business plan and techniques confidential, lest they fall into competitors’ hands.

Based on its perceived partnership with Aeroflow, Body After Baby turned over its confidential information, trained Aeroflow’s employees on the compression garments, and planned to ramp up production. Simultaneously, however, Aeroflow secretly ordered Body After Baby’s products from a retail website in order to copy them and begin selling them under its own brand. Aeroflow allegedly used Body After Baby’s product images, descriptions, and size charts to sell its knockoff products.

The Claim-Categorization Switcheroo—You Say Unfairness, I Say Deception

Body After Baby brought several claims against Aeroflow, including for fraud and unfair or deceptive trade practices.

The court divided the fraud claims into two categories: (1) the July 2018 call, and (2) statements made outside the call. Because Body After Baby did not allege the who, where, or when of the statements outside the call, fraud claims about those statements fell short of Rule 9(b)’s particularity requirement and were dismissed. The court limited Body After Baby’s fraud claims to only the July 2018 phone call.

Body After Baby also asserted a direct unfairness claim, claiming that Aeroflow feigned interest in a collaborative business relationship to induce Body After Baby to share its product designs and business plan. Aeroflow then used that information to copy Body After Baby’s products and business model while acting like the companies were working together.

Aeroflow argued that this unfairness claim was just a repackaging of Body After Baby’s fraud claims, so it should stand or fall with those claims. The court agreed. Although couched in terms of unfairness, the court concluded that the crux of the unfairness claim was the statements and conduct underlying the fraud claims.

Because the unfairness claim involved deceptive conduct, it had to be pleaded with particularity, just like the fraud claims. Consequently, the unfairness claim was limited in the same way as the fraud claims: Only the July 2018 phone call—and not any other statements or conduct—could support it. This result significantly narrows the universe of facts that Body After Baby can use to support its section 75-1.1 at summary judgment or trial.

The lesson here? Claim categorization matters. If Body After Baby convinced the court that its claim fell in the direct-unfairness bucket, it would not have been held to a higher pleading standard. The claim then would have had a better chance of advancing to trial unscathed.

Nexus Technologies, Inc. v. Unlimited Power, Ltd.

The case that did advance to trial, Nexus Technologies, is a patent inventorship and business dispute before Chief Judge Martin Reidinger in the Western District of North Carolina.

Christopher Petrella, one of the defendants, developed a basic concept for a portable solar-energy system. Petrella met with Daniel Conti, one of the plaintiffs, about ideas to improve Petrella’s product concept. Shortly after this meeting, Conti sent Petrella a product proposal with design details, diagrams, and estimates of the project cost. The proposal stated that Nexus Technologies, Inc., Conti’s company, owned the intellectual property in the proposal.

Petrella claimed that the parties’ relationship changed after he received this proposal, and Nexus would only supply circuit boards for the product. There was no written contract or confirmation memorializing this arrangement, though.

About a year after Conti and Petrella’s meeting, Nexus emailed another proposal with a modified product design. Shortly after receiving this proposal, Petrella submitted a patent application that mimicked Nexus’s proposal but removed all references to Nexus.

Petrella then formed Unlimited Power, Ltd. Instead of using Nexus only as a circuit board supplier, Petrella said that he and Conti discussed merging Nexus and Unlimited Power. Later that year, Conti sent Petrella product renderings created by a Nexus design engineer. Several months later, Petrella submitted two more patent applications containing those renderings.

Petrella later asked Conti to send a written manufacturing agreement under which Nexus would manufacture circuit boards, manage product development efforts, and find other component part suppliers for the product. In exchange, Unlimited Power would either pay or merge with Nexus. Conti never sent such an agreement.

Eventually, Petrella worried that Nexus was negotiating the merger in bad faith. Petrella claimed that Nexus missed deadlines to provide product prototypes, refused to provide financial information needed for a merger, and repeatedly made last-minute changes to the merger’s terms as the parties neared agreement. Petrella alleged that this conduct was aimed at keeping Unlimited Power from bringing the portable solar-energy product to market while Nexus secretly developed a similar, competing product.

In 2018, Petrella received patents for the applications that he submitted based on Nexus’s proposal and product renderings. Nexus and Unlimited Power finally ended merger discussions in August of that year. By that time, Nexus had developed its own portable solar-energy system.

Nexus and three of its employees sued Petrella and Unlimited Power to have themselves listed as inventors on the patents that Petrella obtained. They also sought damages for unfair or deceptive trade practices, conversion, and unjust enrichment. Petrella and Unlimited Power counterclaimed for breach of contract, unfair or deceptive trade practices, and other claims.

Direct Unfairness: An Easier Road to Trial

Plaintiffs sought summary judgment on the section 75-1.1 counterclaim, among others. That counterclaim was based on Nexus’s feigning interest in a merger agreement or manufacturing contract—contracts that never materialized—to buy time to bring a competing product to market.

Like Body After Baby’s claim in Aeroflow, the counterclaim alleged that a company faked a collaborative product-development relationship to bring a competing product to market and snuff out the claimant’s business. The Nexus Technologies court analyzed this theory much differently than the Aeroflow court, though.

The Nexus Technologies court appeared to examine the claim through an unfairness lens, not a deceptive-conduct lens. At the summary-judgment stage, deception-based section 75-1.1 claims often struggle to show actual and reasonable reliance, but there was no discussion of reliance in the court’s analysis (and the plaintiffs did not raise this argument in their summary-judgment briefing). Instead, the court outlined the unfairness liability standards discussed above, summarized the relevant evidence—that Nexus missed product prototype deadlines, stalled merger discussions, and then brought a competing product to market—and concluded that the section 75-1.1 claim could proceed to trial.

Again, claim categorization matters. Here, the court likely viewed the counterclaims as ones for direct unfairness, not deception. Deception-based section 75-1.1 claims are harder to get to trial. Staying on the unfairness side of the road is an easier route to a jury.

Notably, and unlike in Aeroflow, fraud or misrepresentation claims were not at issue when the court examined the section 75-1.1 claim. This may have subtly influenced the court away from categorizing that claim as deception-based.

Don’t Count Your Chickens…

Getting a section 75-1.1 claim to trial in a commercial case is no small feat, so the court’s summary-judgment decision likely gave the defendants a second wind. Theirs wasn’t the only remaining section 75-1.1 claim, though. Plaintiffs’ claim went to trial, too. That trial occurred in March 2021.

The result? Although it survived summary judgment, the court dismissed the section 75-1.1 counterclaim before it got to the jury. Defendants’ trial evidence apparently didn’t support the theory that they laid out to oppose summary judgment.

Plaintiffs fared better. The jury found that they were inventors of the patents that Petrella obtained using their designs. The jury also awarded them over $10.5 million in compensatory damages for conduct underlying their section 75-1.1 claim.

What conduct did the jury find? Petrella convinced Nexus to develop and share ideas about an improved portable solar-energy product under the pretense that he would hire Nexus to design and manufacture the product. Then, Petrella secretly used those ideas to obtain patents for himself and to harm Nexus’s business. The trial court concluded that this conduct was unfair and deceptive and trebled the jury’s award to nearly $32 million.

How was this immensely successful section 75-1.1 claim categorized? It’s tough to say. Defendants never sought pretrial dismissal of the claim, so plaintiffs didn’t have to pick a position on claim categorization. Moreover, the trial court’s judgment said that the conduct was both unfair and deceptive, so claim categorization may not have occurred at trial, either.

The judgment’s wording may give plaintiffs several bites at the claim-categorization apple on appeal. To reverse, the Fourth Circuit likely must conclude that the defendants’ conduct was neither unfair nor deceptive. In their post-verdict motion, the defendants did not raise that issue, so the claim-categorization question may be academic.

Think Carefully About Claim Categorization

Each of the section 75-1.1 claims discussed above shared similar factual themes but fared far differently. Claim categorization (or failing to force the issue before trial) may explain those disparate results.

Whether prosecuting or defending a section 75-1.1 claim, think long and hard about which bucket the claim might fall into. How the claim is categorized often dramatically impacts the chances of success.

When defending a section 75-1.1 claim, consider using a pretrial dispositive motion to pin down the other side’s liability theory. The defendants in Nexus Technologies didn’t do this, so the section 75-1.1 claim cruised to trial uncategorized and ended with an eight-figure verdict.

Section 75-1.1 claimants, on the other hand, should strive to maximize the number of categories into which their section 75-1.1 claims may fall. This preserves flexibility and increases the chances of getting the claim to trial.

Author: Steven Scoggan

June 8, 2021 Steven A. Scoggan
Posted in  Direct Unfairness Misrepresentations Substantial Aggravating Circumstances