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Category Archives: North Carolina law

NORTH CAROLINA COURT REFUSES TO EXTEND NON-COMPETE TO NON-SIGNATORY, PUTATIVE OWNER OF BUSINESS

Posted by Eric Welsh on January 31, 2012 – 11:42 am

Filed under NC Court of Appeals, North Carolina law, Trade Secrets, Unfair Competition

Rejecting a novel attempt to extend the reach of a non-compete agreement to the putative owner of a business who had not personally signed that non-compete, the North Carolina Court of Appeals in Phelps Staffing v. S.C. Phelps, Inc., last month upheld the decision of the trial court which declined to find liability against the putative owner.

The Phelps case involved the not so uncommon fact pattern of a sale of a business with the owner (or in this case, putative owner) forming a new company to compete in the same space as the old company after the close of the transaction, with the parties left to argue about whether the conduct violated any sale agreement. In the Phelps case, S.C. Phelps (SCP) was sold through an asset purchase agreement to plaintiff Phelps Staffing, LLC. As part of the transaction, the sole shareholder of SCP, Ms. Sheila Phelps, agreed to sign on her behalf and on behalf of SCP, a non-compete agreement. Ms. Phelps’ husband, Charles Phelps, who was not an owner of SCP but was instrumental in acquiring new customers, refused to sign a non-compete agreement. Ms. Phelps was allegedly disassociating herself from the business, so the non-compete was not an issue. Mr. Phelps, on the other hand, had allegedly started his own company C.T. Phelps, Inc. (CTP), and evidently was keeping the option open of competing in the future. Mr. Phelps received half of the proceeds from the sale, but did not personally sign the asset sale agreement.

According to the opinion, following the sale of the business, Mr. Phelps informed his wife that he intended to reenter the contract labor staffing business and would do so through his new company, CTP. Mr. Phelps contacted former customers of SCP and solicited them to do business with his new company. Mr. Phelps also allegedly “flipped” some of the contract workers to his new company from SCP. Ms. Phelps provided some marginal assistance to her husband in acquiring and installing accounting software on new computers. Several months later, plaintiff Phelps Staffing, LLC filed suit against Mr. and Mrs. Phelps, SCP and CTP for breach of the non-compete and confidentiality provisions, trade secret misappropriation and unfair competition, among other claims. Following summary judgment and later a bench trial, the trial court found in favor of Mr. and Mrs. Phelps on the non-compete claims. The plaintiff appealed the decision.

On appeal, plaintiff argued that Mr. Phelps, although not a signatory to the non-compete agreement, was nonetheless subject to it as he was the “true owner” of SCP. In support of this argument, the plaintiff apparently did not cite to and rely upon North Carolina authority. Instead, plaintiff relied on a Montana case, Bolz v. Myers, 651 P.2d 606 (Mont. 1982).

In Bolz, the plaintiff there, Dale Bolz, purchased a hearing aid center, which was negotiated between Bolz and defendant Mason Myers. Myers wife and son executed the purchase agreement, while Mason Myers did not. The purchase agreement contained a non-compete agreement and in that case, the Montana Supreme Court found it binding on Mason Myers based in large part on the fact that Mason Myers was asked by Bolz and gave oral assurance to him that he had no intention of competing against Bolz after the sale. In Phelps, the plaintiff argued that Bolz was factually on point. The North Carolina Court of Appeals disagreed, finding the absence of any such oral assurance by Charles Phelps to be dispositive of the issue.

While there are several interesting aspects to this case — not the least of which is the fact that somehow all of “financial and accounting data sets” of the prior business (SCP) were somehow installed on the new computer at CTP yet no liability was found against defendants for unfair competition – perhaps the most interesting is the question of whether the Court of Appeals would have accepted and applied Bolz had the facts been slightly different. The Court of Appeals did not just reject the proposition out of hand. The Court of Appeals, while noting the opinion was not controlling, agreed with the plaintiff that there were factual similarities between Bolz and the present case, but then found the lack of oral assurance to be a key fact that distinguished the present case from Bolz.

Perhaps the door has been left open just a bit for such an application in the future. But if such an argument were to be considered, it would face great hurdles. First, the facts would likely have to approach some manifest injustice to the plaintiff, arising almost to fraudulent conduct in deceiving the plaintiff to proceed with a sale of the business without obtaining a non-compete from one of the key persons at the seller. Second, the plaintiff would have to overcome the fact that non-competes are disfavored in the law of this State. Finally, the plaintiff would have to overcome N.C. Gen. Stat. 75-4, requiring non-competes be in writing, signed by the party to be bound, for it to be legally enforceable. For some reason, the Court of Appeals did not discuss this provision. Whether a Bolz type case could find a foothold here in North Carolina would seem to be a long shot but time will tell.

FOURTH CIRCUIT REVIVES TRADE SECRET CLAIM BASED ON SOFTWARE COMPILATION

Posted by Eric Welsh on March 28, 2011 – 12:42 pm

Filed under NC Business Court, NC Court of Appeals, North Carolina law, Trade Secrets

In an unpublished opinion from earlier this month, the Fourth Circuit Court of Appeals found sufficient evidence presented at the trial court level to support the plaintiff’s claim that its software was a compilation of information protected under Virginia’s Trade Secret Misappropriations Act. Decision Insights, Inc. v. Sentia Group, Inc., No. 09-2300 (4th Cir. March 15, 2011).
In Decision Insights, the court was presented with the question of whether Decision Insights had presented sufficient evidence at the trial court level to support its claim that its software was a trade secret under Virginia law for the case to go to a jury. In that case, Decision Insights alleged that it had developed a software called “Dynamic Expected Utility Model” (”EU Model”), which was an analytical tool used to prepare negotiating strategies. The software allegedly applied concepts from a number of disciplines, including mathematics, economics and political science, to predict the outcomes of political or business situations. Decision Insights alleged that three of the individual defendants, who had been previously affiliated with Decision Insights, created a competing company and in the process developed software “almost identical” to Decision Insights’ EU Model. Decision Insights alleged that the Defendants’ software “could not achieve results equal to [Decision Insights'] software unless all the parameters, variables, and sequencing associated with the programs are equal.” Decision Insights alleged that the three individual defendants breached their non-disclosure agreements with Decision Insights and that all of the defendants misappropriated Decision Insights’ trade secrets under Virginia law.

At the trial court level, the defendants challenged the plaintiffs’ trade secret assertions. The lower court, in ruling on a motion for summary judgment filed by the defendants, found that while the Plaintiff had shown the EU Model was unique, it had “failed to distinguish which aspects of its software, as a compilation, are publicly available or readily ascertainable and which are not.” The district court granted the defendants’ motion and entered judgment in their favor.

On appeal, the Fourth Circuit reviewed district court’s decision as to the trade secret claim. The Fourth Circuit first noted that the Virginia statute recognizes “compilation of information” as being a trade secret, if not generally known or readily ascertainable by proper means, and specifically, that “computer source code as a compilation can qualify as a trade secret.” The Fourth Circuit then reviewed the evidence presented and concluded that the Plaintiff had presented sufficient evidence to establish the trade secret status of the “software compilation” for a jury to consider. As observed by the Court: “Although the EU Model uses certain mathematical formulas that are in the public domain, [Decision Insights] asserted that the combination and implementation of these formulas in [Decision Insights'] source code for the software constitutes a trade secret.” The Fourth Circuit found sufficient evidence to support this trade secret claim and remanded the case to the District Court for further consideration of other issues, including whether the Plaintiff had met its burden to show that it had taken reasonable measures to protect the alleged trade secret, another element of a trade secret claim.

While interesting in a number of respects, the Fourth Circuit’s opinion reaffirms that “compilations of information,” even when some of that information may be in the public domain, can be a trade secret. The North Carolina Court of Appeals has similarly found under the North Carolina Trade Secrets Protection Act that a compilation of business information can be a trade secret and protectable. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 174 N.C. App. 49, 620 S.E.2d 222 (N.C. App. 2005). In that case, Sunbelt alleged that the Defendants, through an orchestrated raid of its business, created a competing company by misappropriating Sunbelt’s trade secrets consisting of a “compilation of business information.” Following a bench trial, the North Carolina Business Court entered judgment in Sunbelt’s favor on the trade secret claim, among others, which was affirmed on appeal: “Defendants argue plaintiff’s ‘compilation of broad generalized categories of ever-changing business information’ does not qualify as a trade secret. We disagree.” Id.

These cases are instructive. Trade secrets are not always the Coca Cola formula. Trade secrets can include customer lists, pricing data and even compilations of valuable business information, which may be in the public domain in part, but taken as a whole, have value and are unique. As demonstrated by the Sunbelt and Decision Insights opinions, it is the totality of the information that merits protection under the trade secrets statutes and each case must be evaluated on their facts to see if the elements of the trade secret claim are met.

TRADE SECRET THEFT CLAIM DOES NOT REQUIRE DIRECT PROOF OF ACTUAL MISAPPROPRIATION

Posted by Eric Welsh on August 3, 2010 – 11:59 am

Filed under NC Business Court, NC Court of Appeals, North Carolina law, Trade Secrets

A recent decision by the North Carolina Court of Appeals (Armacell LLC v. Jeffrey Bostic, et al., No. COA09-1160 (July 20, 2010)) reminds us that under the North Carolina Trade Secrets Protection Act, N.C. Gen. Stat. § 66-152, direct evidence of misappropriation is neither required nor necessary to establish a claim for misappropriation.

Armacell LLC manufactured foam insulation products and employed Jeffrey Bostic in its Research and Development Group as a Senior Research Scientist. Armacell had developed and marketed a foam insulation that was based on ethylene propylene diene methylene (EPDM), which was superior to other pipe insulation in terms of its fire test ratings. Armacell competed with K-Flex, which did not have an EPDM product prior to this dispute.

In its complaint, Armacell alleged, among other things, that Bostic and K-Flex had misappropriated Armacell’s trade secrets for the EPDM insulation product. Armacell alleged that Bostic resigned from Armacell to accept a position as a chemist at K-Flex and in the process, undertook ”a surreptitious campaign of disloyal actions,” copying onto external hard drives thousands of competitively sensitive and confidential information of Armacell. Armacell asserted that K-Flex, which did not have an EPDM product, had been struggling to compete with Armacell in the sale of two inch thick pipe insulation. After Bostic was hired, however, K-Flex quickly had ready for testing a one-inch thick EPDM product, a product for which K-Flex had no commercial need but which could be reproduced to develop a two-inch EPDM sample. Armacell alleged that this evidence was strong circumstantial evidence of misappropriation.

The North Carolina Business Court agreed with Armacell and issued a preliminary injunction against Bostic, K-Flex and its affiliated company. On appeal, the Defendants challenged the injunction order, asserting that the Business Court erred in finding that Armacell had proven a likelihood of success on the merits of its trade secrets claim. The Defendants contended that Armacell brought only “speculative claims” and “while the evidence demonstrated that Bostic took a significant amount of data from [Plaintiff's] computer system, [Plaintiff] did not show that [Defendants] had a specific opportunity to acquire [Armacell's EPDM formulation].” The Defendants argued that the evidence was simply not sufficient.

The Court of Appeals rejected the Defendants’ argument. In affirming the granting of the injunction, the Court correctly observed that North Carolina’s Trade Secrets Protection Act only requires that the plaintiff make out a prima facie showing of misappropriation and the burden then shifts to the defendant to show that it obtained the subject information lawfully.

Under the Act, a prima facie case is established by “the introduction of substantial evidence that the person against whom relief is sought both:

(1) Knows or should have known of the trade secret; and

(2) Has had a specific opportunity to acquire it for disclosure or use or ahs acquired, disclosed, or used it without the express or implied consent or authority of the owner.” N.C. Gen. Stat. § 66-155.

Once the prima facie showing is made, it is up to the defendant to rebut that evidence through the introduction of “substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret.” Id.

Although the defendants challenged the very nature of the burden shifting in the statute, the Court, consistent with precedent, reiterated the view that the statute in fact contemplates a shifting of the burden of proof. Combs & Associates, Inc. v. Kennedy, 147 N.C. App. 362, 369, 555 S.E.2d 634, 639 (2001); Byrd’s Lawn & Landscaping v. Smith, 142 NC. App at 376, 542 S.E.2d at 693. The reason for the burden shifting is simple: the North Carolina statute reflects the practical reality that “[f]ew defendants leave the proverbial ’smoking gun’” when misappropriating a trade secret. Lawsuits Between Business Competitors: Chapter 75-1.1 and Beyond, Eric D. Welsh, Mecklenburg County Bar Association Business Litigation Forum, February 17, 2006, p. 7. Moreover, due to the frequent absence of direct evidence, a claim for misappropriation will often depend upon circumstantial evidence. Medical Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 658, 670 S.E.2d 321, 329 (2009); Byrd’s, 142 N.C.App. at 377, 542 S.E.2d at 693; Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541, 545 (M.D.N.C. 2002).

In reviewing the record before it, the Court of Appeals found ample circumstantial evidence to support Armacell’s prima facie case of trade secret misappropriation. The evidence showed that Bostic, as a Senior Research Scientist, had knowledge of Armacell’s EPDM technology and K-Flex, which had not developed an EPDM product prior to Bostic being hired by it, had, within a year after hiring Bostic, produced an EPDM sample. Relying on Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C.App. 49, 620 S.E.2d 222 (2005), the Court of Appeals found that this “before and after” evidence was ”sufficient circumstantial evidence to show Defendants’ opportunity to acquire the trade secrets as well as Defendants’ subsequent use thereof.”

In Sunbelt, a case involving the theft of trade secrets and unfair competition resulting from a corporate raid, the North Carolina Business Court found as persuasive evidence of misappropriation the fact that the Defendants were able to quickly compete against Sunbelt even though they had not invested time to develop independently the requisite resources to do so. As the Business Court stated:

In this instance it may be more important to look at what was not done and the business results. There is no evidence of a unified pricing structure for Hi-Lift. Many salespeople testified that they did not have prices when they began calling on customers. There were no restrictions placed on the sales people concerning use of BPS information. The sales people began calling on the same customers within days of leaving BPS and in some cases went after business that was based on special pricing arrangements. Credit decisions had to be based upon knowledge obtained at BPS, as there is no evidence of the independent development of credit information for the customers called upon at the outset. Indeed, there is little evidence of the independent development of information by Hi-Lift that one would expect in a normal greenfield operation. As previously noted, there was an advantage to Hi-Lift to get the new Hi-Lift branches open in the BPS markets before Sunbelt could close its transaction. The rapidity with which the old BPS customers were identified, called upon and converted to Hi-Lift, despite the lack of business information and guidance from Hi-Lift management, provides strong circumstantial evidence that at least some of BPS confidential information was used to solicit customers. Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 2003 NCBC 4, 2003 WL 21017456 (N.C. Super. May 2, 2003).

As in Sunbelt, the Defendants in Armacell obtained a head start advantage as a result of Bostic’s alleged misappropriation and that advantage, from the Court’s perspective, was sufficient proof of misappropriation.

The Defendants in Armacell attempted to rebut this prima facie showing, arguing that Armacell’s proof showed only that Bostic stole some of Armacell’s information but not the information related to the EPDM product. Defendants’ curious argument, however, failed because they were unable to come forward with ample evidence to explain how it was that they had developed the EPDM product so quickly if not through Bostic’s efforts. Here, it would appear that Armacell caught Bostic with his hand in the “trade secret cookie jar” — perhaps 7000 times — which was more than enough for the Court to conclude, at this stage, that Bostic not only had access to the information but, in light of the absence of a product before and then sudden introduction of a product after his hiring, had misappropriated that information.

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* Parker Poe represented Sunbelt Rentals, Inc. in the Head & Engquist Equipment litigation and Eric Welsh was a member of the trial team.

UNFAIR AND DECEPTIVE TRADE PRACTICES CLAIM FAILS IN PARTNERSHIP DISPUTE EVEN THOUGH PARTNER BREACHED HIS FIDUCIARY DUTY

Posted by Eric Welsh on May 19, 2010 – 12:32 pm

Filed under NC Court of Appeals, NC State Supreme Court, North Carolina law, Unfair Competition

In a split decision last month, the North Carolina Supreme Court held that a claim under North Carolina’s unfair and deceptive trade practices act, N.C.G.S. 75-1.1 (the “Act”) could not stand, even where a partner had been found to have acted “unfairly and deceptively” in his dealings with his other partners, because the Act was not intended to reach the “internal operations of a single market participant.” White v. Thompson, No. 226A09, (NC April 15, 2010).

In White, the defendant, Andrew Thompson, was a partner with plaintiffs Charles White and Earl Ellis in an entity known as Ace Fabrication and Welding (”ACE”). Ace was formed primarily for the purpose of performing specialty construction and fabrication work at a plant owned by Smithfield Packing Company, Inc. At trial, the evidence suggested that ACE enjoyed initial success. Subsequently, infighting and disagreements overtook the partnership. Eventually, Defendant Thompson decided to leave the partnership and start his own business, PAL. While it is unclear from the opinions when he actually advised his partners of his intentions, defendant Thompson at some point advised White and Ellis of this decision but then a dispute arose between the partners regarding the distribution of partnership assets. While still a partner of ACE, defendant Thompson obtained work from the Smithfield Packing facility for PAL. Eventually, White and Ellis sued Thompson for, among other things, breach of fiduciary duty and unfair and deceptive trade practices.

After a trial, the jury found that Thompson had in fact breached his fiduciary duty to his partners and the damages were trebled under the Act. Defendant Thompson appealed the judgment. On appeal, the North Carolina Court of Appeals, in a split decision, reversed the unfair and deceptive trade practices trebling of damages, finding the Act inapplicable to the dispute because it did not meet the “in or affecting commerce” requirement of the Act. White v. Thompson, 676 S.E.2d 104 (N.C. App. 2009). According to the Court of Appeals, “it must be shown that the alleged unfair or deceptive acts had an impact in the marketplace” but “[t]he allegations against Defendant Andrew Thompson do not amount to practices impacting the marketplace.” And while Thompson had been found to have breached his fiduciary duty in usurping partnership opportunities for himself, that did not impact the marketplace. Plaintiffs appealed the decision to the North Carolina Supreme Court.

In another split decision, the North Carolina Supreme Court affirmed the Court of Appeals decision. As with the Court of Appeals, the Supreme Court correctly noted that the Act requires that the unfair or deceptive act or practice be “in or affecting commerce.” The Supreme Court also correctly noted that the Act defines “commerce” as “business activities” which the Court had previously defined as connoting “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase and sale of goods, or whatever other activities the business regularly engages in and for which it is organized.” As the Court noted, the General Assembly intended the Act to “achieve fairness in dealings between individual market participants” in two type of business settings: (1) interactions between businesses and (2) interactions between businesses and consumers.”

Viewing the case from this perspective, the Supreme Court found the claim against Thompson to have involved purely the “internal operations of a single market participant.” The parties were partners in “a single market participant” and Thompson breached his fiduciary duty as a partner in “a single market participant.” The Act, according to the Supreme Court, was not intended to “intrude into the internal operations of a single market participant.”

The Supreme Court’s opinion in White, while perhaps adding some more definition to the Act’s reach, raises at least one important question which the majority opinion fails to answer. In discussing Thompson’s conduct as being purely “internal” to ACE, the Court cites to and discusses briefly its prior decision in Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999). In that case, the defendant there, while employed by Sara Lee, had engaged in self-dealing by creating companies which then supplied to Sara Lee at inflated prices. Sara Lee sued this employee under 75-1.1 and the Court found that the “in or affecting commerce” requirement was met there by the buyer-seller relationship forming the basis of the employee’s self-dealing. 591 S.E.2d at 312. But the Supreme Court, in the White opinion, fails to explain how the usurping of the partnership’s opportunities to himself and PAL is appreciably different from the self-dealing in Sara Lee.

This noticeable absence of explanation was not lost on the dissent in the White case. Justice Hudson, in her lengthy dissenting opinion, argued that Thompson’s conduct, like that of the defendant in Sara Lee, involved other businesses and was covered by the Act. According to the dissent, Thompson’s conduct was not constrained to the internal operations of ACE but involved his competing company, PAL “through which he obtained specialty fabrication work at Smithfield Packing and funneled jobs that had been originally awarded to ACE” and began these activities before he advised Plaintiffs of his intention to withdraw from ACE. Justice Hudson found these facts to put the White case within the parameters of Sara Lee (“This conduct affected commerce in much the same way as the conduct at issue in Sara Lee”). Later, she again noted:

“Rather than supporting the majority’s view, this Court’s decision in Sara Lee strongly indicates that the type of self-dealing found by the jury here is exactly the type of conduct that is covered by the Act.” . . . Indeed, in its discussion of the very definition of “‘commerce,’” this court noted that the Act is subject to a “reasonably broad interpretation” and that “‘we have not limited [the Act's] applicability . . . to cases involving consumers only. After all, unfair trade practices involving only businesses affect the consumer as well.’” White, p. 21 (citations omitted).

While the majority in White does not clearly, or at least convincingly, distinguish these facts from Sara Lee, the majority has made it clear that in the context of a dispute involving the internal operations of a partnership, Chapter 75’s trebling provision will not be available. While not stated, perhaps the Court distinguished Sara Lee on the basis that, in that case, the employee engaged in his self dealing over a considerable period of time and did not disclose this conduct during his employment tenure. Here, although there was some dispute as to exactly when Thompson advised of his intention to withdraw, he clearly had notified his partners of his intention during the time that he had engaged in this conduct. Perhaps the majority was focused on a lack of impact on Smithfield’s business posed by Thompson’s conduct. Finally, the majority may simply have believed that Thompson’s conduct was simply too far removed from “buyer-seller relations” to give rise to a claim under the Act. Whatever the reason, the tug-of-war continues on the reach of Section 75-1.1.

NON-COMPETE SUIT GIVES RISE TO TRADE SECRET CLAIM BUT NOT A CLAIM FOR UNFAIR TRADE PRACTICES

Posted by Eric Welsh on April 26, 2010 – 8:59 am

Filed under Federal Court, North Carolina law, Trade Secrets, Unfair Competition

In an interesting decision from March 2010, the United States District Court for the Western District of North Carolina held that a complaint adequately pled a claim for trade secret misappropriation but not a claim under North Carolina’s Unfair and Deceptive Trade Practices Act (”UDTPA”). ACS Partners, LLC v. Americon Group, Inc., 2010 WL 883663 (W.D.N.C. March 5, 2010). In that case, ACS Partners sued its former employee, Michael Caputo, for breaching his non-compete agreement through his employment at Americon Group, Inc. Americon was also a named defendant in the case. ACS Partners, which was in the construction and renovation business throughout the country, alleged that Caputo, who was ACS’ regional sales manager for North and South Carolina, breached his non-compete by soliciting ACS customers to cease doing business with ACS and to instead do business with Americon. ACS also alleged that Caputo, with knowledge of ACS’ “pricing methodology,” bid for a project for Americon while he was employed by ACS using his knowledge of ACS’ pricing on that project. ACS alleged that the pricing methodology was a trade secret under North Carolina law.

Caputo filed a motion to dismiss, arguing that the non-compete was unenforceable as a matter of law and that ACS had failed to state a claim under both UDTPA and the North Carolina Trade Secrets Protection Act. In a decision rendered by the Magistrate Judge, and adopted by the District Court Judge, the Court found that the non-compete, although vague as to its geographic reach and potentially invalid, was “not per se unreasonable at the motion to dismiss stage.” The Court made this ruling even though it found that the non-compete, which had no geographic restriction but rather was client based, potentially would prohibit the solicitation of prospective customers throughout the United States in the building renovation business.

“If the Court defines ‘prospective’ as ‘expected, likely or future,’ then it is possible that the non-solicitation provision could be overly broad as applied to Caputo. But, the non-solicitation provision is not so unreasonable as to be declared unenforceable as a matter of law on a FRCP 12(b)(6) Motion to Dismiss.”

Apparently, the Court was willing to permit the parties to engage in discovery to determine the meaning of the solicitation provision so the Court could then determine if the provision was invalid. Although this case is ongoing, it will be interesting to see what evidence is produced to demonstrate a meeting of the minds on this point.

Although the discussion of the non-compete is interesting, the far more important discussion relates to the treatment of the UDTPA and trade secrets claims.

The Court curiously found that the complaint did not state a cause of action under the UDTPA. Citing the principle set forth in Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998) that an UDTPA claim cannot “piggyback” on a breach of contract claim, the Court found that the complaint did not allege “substantial aggravating circumstances” that are necessary to support a claim under UDTPA. The Court viewed the dispute as a breach of contract, noting ACS’ UDTPA claim was not “distinct from” the primary breach of the non-compete and confidentiality agreements. The Court’s holding here is somewhat surprising in that ACS’ claims also included a claim in tort for trade secret misappropriation, which the Court upheld. The Court’s decision also seems to run counter to other cases where UDTPA claims were brought, and upheld, in similar situations involving employee breaches of non-compete or confidentiality agreements. See e.g. Philips Electronics North America Corp. v. Hope, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp.2d 541 (M.D.N.C. 2002). Moreover, trade secret misappropriation claims frequently become the basis for an UDTPA claim. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, 00-CVS-10358, North Carolina Business Court, July 10, 2002.

More interesting, though, is the Court’s statement that ACS’ UDTPA claim was defective because it was “wholly divorced from the context of consumer transactions.” The Court cited PCS Phosphate Co., Inc. v. Norfolk Southern Corp., 559 F.3d 212 (4th Cir. 2009) and Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704, 710 (2001) for the proposition that UDTPA was “intended to benefit consumers,” and then extrapolated the principle that an UDTPA claim must address “consumer transactions.” A closer look at Dalton shows that such is not the case. In fact, in Dalton, the North Carolina Supreme Court specifically noted that while UDTPA was intended to benefit consumers, “its protections extend to businesses in appropriate circumstances.” As noted previously, “[U]nfair trade practices involving only businesses affect consumers as well.” United Labs, Inc. v. Kuykendall, 322 N.C. 643, 665, 70 S.E.2d 375, 389 (1988). Other UDTPA claims have been brought in North Carolina against businesses. See e.g. Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999); Static Control Components, Inc., 200 F. Supp.2d at 550; Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).* One would certainly expect that even in ACS, the UDTPA claim would have some impact on consumers. Perhaps this is one of those situations where “you know it when you see it,” and the Complaint just did not show the predicate egregious facts. Whatever the situation, the ACS case gives some pause to the federal court’s willingness to hear an UDTPA claim in the context of an employer-employee dispute even when in the presence of a trade secret misappropriation claim.

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* Parker Poe was counsel to Sunbelt Rentals, Inc. in this lawsuit and Eric Welsh was part of the trial team.

JUST BECAUSE YOU ARE A “WHISTLE BLOWER” DOESN’T MEAN THERE WAS UNFAIR OR DECEPTIVE TRADE PRACTICES

Posted by Eric Welsh on March 17, 2010 – 9:09 am

Filed under NC Court of Appeals, North Carolina law, Unfair Competition

Under Chapter 75-1.1 of North Carolina’s Unfair and Deceptive Trade Practices Act (the “Act”), a plaintiff must prove an “unfair or deceptive act or practice” as an element of the claim, hardly a surprise. Certainly, then, a “whistle blower’s” claim that a company engaged in illegal and fraudulent activity in its business must give rise to a claim under the Act. Not necessarily, or so says the North Carolina Court of Appeals in a decision filed yesterday.

In Combs v. City Electric Supply Co., No. COA09-108 (March 16, 2010), the North Carolina Court of Appeals found that a whistle blower’s unfair trade practices claim failed even though it was based on allegations that the defendant had engaged in illegal and fraudulent conduct. In that case, Combs, a former employee of City Electric Supply Company, was terminated from his position after he had objected to certain business practices of City Electric, which Combs alleged were illegal or fraudulent. Combs filed his complaint alleging wrongful discharge, tortious interference with his contractual rights and unfair and deceptive trade practices under Chapter 75-1.1. Combs alleged “that his employment was terminated in retaliation for reporting ‘that Defendant [w]as stealing from its customers’ accounts’.” Following a trial, the trial court directed a verdict in favor of the defendants on all counts. Combs appealed the decision.

On appeal, the Court found sufficient evidence of City Electric’s obtaining money by false pretenses from its customers and therefore found sufficient grounds for the wrongful discharge and tortious interference claims to go to a jury. The Court reversed and remanded those claims for a new trial.

The Court, however, was not so inclined when it came to the Chapter 75-1.1 claim. As to that claim, the Court affirmed the directed verdict for the defendants. Noting that a plaintiff must prove not only an “unfair or deceptive act or practice” under Chapter 75-1.1, but also that that act or practice was “in or affecting commerce” and “proximately caused injury to the plaintiff,” citing Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001), the Court found that Combs’ complaint “involved a simple employment dispute” and did not involve acts “in or affecting commerce.” Relying on precedent which establishes that the Act does not apply to general employer-employee relationships, the Court concluded that Combs’ claim did not affect commerce and did not fall within Chapter 75-1.1, regardless of the “whistle blowing” allegations.

Combs attempted to distinguish his claim from those found in ordinary employer-employee relationships, citing to Sarah Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999) and Walker v. Sloan, 137 N.C. App. 387, 529 S.E.2d 236 (N.C. App. 2000), cases involving employer-employee relationships with Chapter 75-1.1 claims. The Court found Combs’ argument unconvincing, distinguishing both Sarah Lee and Walker from Combs’ situation.

“In both Sarah Lee Corp. and Walker, the Court focused upon conduct that constituted activity ‘affecting commerce’ that occurred between the employer and employee and held that N.C. Gen. Stat. 75-1.1 was applicable to those cases. . . . In the instant case, there was no evidence presented before the trial court of any conduct that would constitute activity ‘affecting commerce’ between plaintiff and City Electric. Plaintiff only asserts that he was fired in retaliation for ‘blowing the whistle’ on City Electric’s practice of not sending out negative balance statements at the end of each month.”

Based on this reasoning, the appellate court found Combs’ Chapter 75-1.1 claim to lack merit.

The City Electric case is interesting in several respects. First, an observation can be made that just because an act or practice is deceptive or unfair does not by itself mean that a claim under Chapter 75-1.1 can be brought. A proper nexus must be found with “commerce” for a claim to exist. Here, although the underlying alleged act of fraud gave rise to an alleged “whistle blowing,” because the crux of the claim involved a “simple employment dispute,” a Chapter 75-1.1 claim was not found.

A second, converse observation can be made: just because the underlying facts involve an employer-employee relationship does not necessarily mean that a Chapter 75-1.1 claim cannot be brought. Indeed, the Court noted both the Sara Lee and Walker cases as examples where a Chapter 75-1.1 claim existed even in the context of an employer-employee dispute. Another example, although not cited by the Court in City Electric, is Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).

In that case, Sunbelt alleged that the defendants had engaged in unfair and deceptive trade practices under Section 75-1.1 when they raided Sunbelt’s business for its employees and confidential, trade secret information. Following a trial, Sunbelt obtained a judgment in its favor on the unfair and deceptive trade practices act, even though the claims involved to some extent the employment relationships between Sunbelt and certain of its former employees. The Business Court found the claim valid due to the fact that the case involved claims of trade secret misappropriation and tortious interference with Sunbelt’s business relations and therefore a proper nexus was found between the deceptive acts and practices and commerce. Sunbelt’s judgment was affirmed on appeal.

So what do we take away from this discussion? Perhaps, that while a “whistle blower” may not have facts sufficient to make out a claim under the Act, the fact that a claim is in the context of an employer-employee relationship is not necessarily fatal to bringing an unfair and deceptive trade practices claim under Chapter 75-1.1. As in any legal matter, the facts matter.

Parker Poe represented Sunbelt Rentals in Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, and Eric Welsh was part of the trial team.