Category Archives: Unfair Competition

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

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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.

IN SOUTH CAROLINA, A HORSE CAN BE A ZEBRA: SOUTH CAROLINA SCRUTINIZES CONFIDENTIALITY AGREEMENT UNDER NON-COMPETE STANDARD

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Posted by Eric Welsh on February 3, 2010 – 12:11 pm
Filed under SC Court of Appeals, South Carolina Law, Trade Secrets, Unfair Competition

In perhaps another example of a case where a court has looked at substance over form in determining the validity of a claim (see prior blog entry: JUST BECAUSE THE HORSE HAS STRIPES ON IT DOESN’T MAKE IT A ZEBRA — Business Court Finds “Securities Transaction” Beyond the Reach of Chapter 75), the Court of Appeals in South Carolina last year affirmed the trial court’s finding that a confidentiality agreement was enforceable after scrutinizing it under standards applicable to non-compete agreements. Milliken & Co. v. Morin, 685 S.E.2d 828 (Ct. App. 2009). This case, interesting in several respects, highlights a significant distinction between North Carolina and South Carolina law with respect to confidentiality agreements: South Carolina, unlike its neighbor to the north, can subject confidentiality agreements to heightened scrutiny typically given to non-compete agreements to determine if the agreement is enforceable. If the agreement tends to restrict competitive employment, then it will treated as a non-compete agreement and reviewed as such under applicable law. Again, labels do not control; substance does.

In the Milliken & Co. v. Morin case, Milliken had employed Morin as a research analyst. As part of his employment, Morin signed an employment agreement with Milliken, which contained an inventions assignment provision, a non-compete provision and a confidentiality provision. In his position with Milliken, Morin allegedly developed an idea to create a high modulus multifilament polypropylene fiber. Milliken apparently did not pursue the idea of developing this fiber. Morin subsequently resigned from Milliken, created his own company, and filed a patent for a high modulus multifilament polypropylene fiber. Upon learning of Morin’s conduct, Milliken brought suit against him, alleging claims for, among other things, breach of contract with respect to the confidentiality provision and violation of South Carolina’s Trade Secrets Act. At the close of Milliken’s case at trial, Morin moved for a directed verdict, arguing that the confidentiality agreement was unenforceable. The trial court denied the motion and Morin appealed the decision.

The central issue in Morin’s appeal, which is of interest here, was whether the confidentiality provision satisfied “the same strict scrutiny” applied to non-compete agreements under South Carolina law. The appellate court, citing Carolina Chem. Equip. Co. v. Muchkenfuss, 471 S.E.2d 721, 723 (Ct. App. 1996) for the proposition that “a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny,” analyzed Morin’s confidentiality provision under standards applicable to non-compete agreements, and determined that the provision “did not substantially restrict Morin’s competitive employment activities” and was enforceable. In arriving at this conclusion, the court noted that the provision did not “prohibit Morin from disclosing or using any and all information he learned working at Milliken, or using the general knowledge and skills he learned while working there.” The court also found the provision reasonable as to time period and territory.

The Milliken case raises several important questions. First, should the Milliken decision be read to stand for the proposition that all confidentiality agreements must meet the standards set for non-compete agreements to be enforceable? While not expressly addressing the issue, the court suggests that may be the case. In its analysis, the Milliken court quickly jumped to the Muckenfuss decision, stating “In Muckenfuss, the court determined a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny.” However, the Milliken court did not initially address whether the confidentiality provision had this effect as to Morin. The court did not consider the competitive effect of the confidentiality provision as an initial matter and simply proceeded to an analysis under the non-compete standards. There certainly is a healthy question as to whether Muckenfuss should be read for the proposition that all confidentiality agreements, regardless of reach or effect, must be analyzed under the standards set for non-compete agreements.

Second, if Muckenfuss and now Milliken are to be read broadly to reach all confidentiality agreements, then one is left to ask about what that means for the enforceability of confidentiality provisions that prohibit an employee from disclosing confidential information of his former employer in a non-competitive setting. For example, if a former employee disclosed confidential information on the internet out of spite or revenge, such disclosure would not be in a competitive environment. Yet, the enforceability of the confidentiality provision, and redress for the wrong, might still turn on whether it met the “strict scrutiny” afforded to non-compete agreements. If the provision lacked any territorial limitation, would it nevertheless be found enforceable and a tool for redress against such conduct? Applying a broad reading to Muckenfuss and Milliken could lead to the conclusion that even in such a situation the confidentiality agreement may be found invalid.

With the adage “better safe than sorry,” the uncertainties surrounding confidentiality agreements in South Carolina suggest the need to draft confidentiality agreements in a manner that is compliant with the standards set for non-compete agreements. Among other things, confidentiality agreements should be kept narrow to avoid a charge that it would prevent the employee from “using the general skills and knowledge he gained” at the former employer. Carolina Chemical Equipment Co., Inc. v. Muckenfuss, 471 S.E.2d 721, 724. In this case, the “horse” may actually be a zebra, even though it lacks the stripes, and should be handled accordingly.

JUST BECAUSE THE HORSE HAS STRIPES ON IT DOESN’T MAKE IT A ZEBRA – Business Court Finds “Securities Transaction” Beyond the Reach of Chapter 75

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Posted by Eric Welsh on January 28, 2010 – 9:05 am
Filed under NC Business Court, South Carolina Law, Unfair Competition

In a decision rendered in October 2009, the North Carolina Business Court dismissed a claim brought under North Carolina’s Unfair and Deceptive Trade Practices Act, finding that the conduct alleged was a “securities transaction” and beyond the scope of Chapter 75. Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, National Association, 08 CVS 27739 (Oct. 6, 2009).

In that case, Charlotte-Mecklenburg Hospital brought a series of claims against Wachovia Bank related to a Securities Lending Agency Agreement. It was alleged that under that Agreement, Wachovia was to manage cash collateral investments on the Plaintiff’s behalf pursuant to specific investment guidelines governing the investment activity. It was further alleged that Wachovia made an imprudent investment as part of this securities lending program. The Plaintiff alleged that the investment was too risky and that Wachovia failed to liquidate the investment timely, resulting in a loss of $14 million.

In moving to dismiss the complaint, Wachovia challenged the Unfair and Deceptive Trade Practices claim on the basis that securities transactions are exempted. Citing Skinner v. E.F. Hutton & Co., Inc., 333 S.E.2d 236, 241 (1985), Wachovia argued the Plaintiff’s allegation related to a security transaction and therefore was outside the reach of Chapter 75. In response, the Plaintiff acknowledged that the statute does not govern securities transactions but tried to escape dismissal, arguing that the subject of the claim involved “investment advice” and an “investor/investment advisor relationship,” not “securities transactions.” In advancing this argument, however, the Plaintiff failed to rely on any controlling authority that was apposite to the issues at hand. The Business Court rejected the Plaintiff’s attempt to reclassify its claim.

While correctly noting that the commerce element of Chapter 75-1.1 encompasses a broad range of business activity, the Business Court stated that “it does not cover ‘all wrongs’ in a business setting.” Id. citing Sterner v. Penn, 159 N.C. App. 626, 632-33, 583 S.E.2d 670, 675 (2003). The Business Court went on to cite North Carolina case law that has excluded securities transactions, beyond conventional securities, from the reach of the statute. See e.g. Oberlin Capital, LP v. Slavin, 147 N.C. App. 52, 62, 554 S.E.2d 840, 848 (2001) (Chapter 75 claim dismissed in case involving a loan agreement). Noting that courts have previously held that “transactions entered into for purposes of raising capital also qualify as a ’securities transaction’,” Id., the Business Court found the “securities lending program” at issue in the case to be similar to “raising capital” and therefore beyond the statute’s definition of “in or affecting commerce.”

Ultimately, the Business Court was not persuaded by the Plaintiff’s creative labeling. Reading Plaintiff’s argument, one is reminded of Shakespeare: “A rose by any other name would smell as sweet.” The Plaintiff’s argument was certainly not made any easier by the fact that, while at the same time it argued its claim did not involve securities transactions, it brought a separate claim against Wachovia for a violation of North Carolina Securities Act and relied on the same basic facts for both of these claims.

FTC Moves Forward with Stand-Alone Section 5 Claim

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Posted by Eric Welsh on January 5, 2010 – 3:49 pm
Filed under Antitrust Developments, FTC, Unfair Competition

With its December 2009 issuance of a complaint against Intel (In the Matter of Intel Corp., Dkt. No. 9341), the Federal Trade Commission has re-opened a multi-decade debate about its use of Section 5 of the FTC Act to challenge antitrust-type conduct that cannot be reached by application of the antitrust laws.

This issue has had a rollercoaster ride, starting with the Supreme Court decision of FTC v. Sperry & Hutchinson, 405 U.S. 233, 244 (1972), where the Court stated that the FTC had authority to “consider [] public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.” Since then, the application of Section 5 as a stand-alone claim for conduct outside of the antitrust laws suffered setbacks with decisions rendered by the Second and Ninth Circuits in the 1980’s and then by the FTC itself in its General Foods Co. case, 103 F.T.C. 204 (1984) where it rejected an attempt by complaint counsel to apply Section 5 to predatory pricing practices that did not violate Sec. 2 of the Sherman Act.

Section 5 was somewhat revived in the 1990’s when the FTC applied it to obtain consent decrees in several “attempt to collude” cases not reachable by the Sherman Act Sec. 1. Despite this attention by the FTC, the weight of scholarly comment remained against such application of Sec. 5.

Despite the well-reasoned commentary, the FTC’s attempt to use Section 5 for claims not reachable by the antitrust laws did not cease. In its settlement in the Negotiated Data Solutions case (”N-Data“) in January 2008 (File No. 051-0094), statements by the commissioners acknowledged that the FTC was applying Sec. 5 but not the Sherman Act to antitrust-type conduct that harmed consumers by undermining the standard-setting process. Two commissioners dissented, including Chairman Majoras who warned that the majority’s failure to “identif[y] a meaningful limiting principle” threatened to take the Commission “down a slippery slope” in its application of Section 5.

The N-Data case led to much speculation about the Commission’s view and use of Section 5 stand-alone claims in the future. Chairman Jon Leibowitz addressed the issue in September 2009 by acknowledging that N-Data “was not an antitrust case because the bad behavior did not cause or increase the firm’s monopoly power” and forecasting: “you are likely to see us try to protect consumers by expanding the use of our authority to prohibit unfair methods of competition.” Remarks of Chairman Jon Leibowitz, 36th Annual Conference on International Antitrust Law & Policy, Fordham Competition Law Institute at Fordham Law School, September 24, 2009.

Over the past two years, statements by the Commissioners have fueled the speculation over the Commission’s approach to Section 5’s reach and shined a light on a number of vexing issues. In March 2009, Commissioner Rosch addressed these matters but declined to make any firm predictions, providing instead “tentative views.” See The FTC’s Section 5 Hearings: New Standards for Unilateral Conduct? Remarks of J. Thomas Rosch, Commissioner, Federal Trade Commission, ABA Antitrust Section, Spring Meeting, Washington, D.C., March 25, 2009. Chairman Leibowitz has expressed his view that Section 5 is not confined by Sherman Act standards: “So everyone can agree (I’ve decided) that the FTC Act goes beyond the metes and bounds of the Sherman Act. The more important question is: how far beyond should we go.” See “Tales from the Crypt.” Episodes ‘08 and ‘09: The Return of Section 5 (”Unfair Methods of Competition in Commerce are Hereby Declared Unlawful”). Remarks of Commissioner Leibowitz, Section 5 Workshop, October 17, 2008. Commissioner Rosch and Chairman Leibowitz have noted that Section 5 would be used as a “gap filler.” Id. Chairman Leibowitz has also expressed reluctance to use Section 5 in the merger context. And Commissioner Rosch has repeatedly discussed application of Section 5 using “appropriate limiting principles.” Id.

Elsewhere, however, the FTC and its complaint counsel have been emphatic in opposing arguments that they sought to apply Sec. 5 to conduct not reachable by the antitrust laws. For example, in In the Matter of Polypore International, Inc., Docket No. 9327, Polypore challenged the FTC complaint for indefiniteness and for failure to state a claim of monopolization and attempted monopolization under Sherman Act standards. Complaint Counsel emphatically denied they were trying to create new law (”There is simply no express or implied attempt here to create new law.” Complaint Counsel’s Response to Respondent’ s Motion for a More Definite Statement, In the Matter of Polypore Int’l, Docket No. 9327 (emphasis in original)) and stated that the “Court need not address whether Section 5 reaches beyond the Sherman Act . . . because each claim in the Commission’s Complaint states a cause of action under traditional Sherman Act standards.” Complaint Counsel’s Response to Respondent’s Motion to Dismiss Counts II and III of the Complaint for Failure to State a Claim, p. 4, In the Matter of Polypore Int’l, Docket No. 9327.

Putting the reach of Section 5 to the side, there is also now vigorous debate regarding the standards, also known as “limiting principles,” that should be applied if Section 5 is used as a stand-alone antitrust statute. Commissioner Rosch himself raised many of these difficult questions in the Section 5 Workshop:

“All of this said, however, there exists a myriad of open questions in my mind. Most fundamentally, are my premises right? Put differently, should enforcement of Section 5 be confined to conduct that the Commission also finds does not violate the Sherman Act (or the Clayton Act)? If so, what kind of business conduct besides the conduct challenged in Valasis and N-Data should be covered by Section 5, and what kind of conduct should not be, either on legal or policy grounds? Should conduct that cannot be shown to injure the competitive process ever be considered an unfair method of competition, and, if so, when? How can the Commission avoid creating a rudderless, unbounded standard acceptable to whoever happens to be the majority of the FTC Commissioners at the time? What should be the practical, workable boundaries susceptible to coherent application? How can unfair methods of competition under Section 5 be defined to avoid capturing benign or procompetitive conduct while allowing for sufficient guidance and predictability for business? . . . Can we conclusively say that bringing the statute back to life outweighs any risks?” Welcoming Remarks, Commisioner, J. Thomas Rosch, FTC Section 5 Workshop, Washington, D.C., October 17, 2008.

Commissioner Kovacic also recently noted the unresolved concerns regarding the standards to be applied with a Section 5 claim. The Application of Section 5 of the Federal Trade Commission Act, William E. Kovacic, U.S. Federal Trade Commission, ABA Fall Forum, Washington, D.C. November 12, 2009.

With these issues still unresolved, the Commission has now marched forward with its Intel complaint, which asserts both Sherman Act Sec. 2 violations and stand-alone Section 5 claims regarding conduct not reachable by the Sherman Act. In an accompanying statement, Chairman Leibowitz and Commissioner Rosch argue the necessity of the Commission bringing a stand-alone Section 5 case because “some conduct harmful to consumers may be given a ‘free pass’ under antitrust jurisprudence.” Statement of Chairman Leibowitz and Commissioner Rosch, In the Matter of Intel Corp., Docket No. 9341. Yet, while later stating that “the Commission is well aware of its duty to enforce Section 5 responsibly,” the questions asked by Commissioner Rosch a year ago remain unanswered. Again, begging Commissioner Rosch’s prior questions, Chairman Leibowitz and Commissioner Rosch state: “Section 5 is clearly broader than antitrust laws, but it is not without boundaries, and the Commission will clearly describe and stay within those boundaries if this case comes before it for review.” Id.

Commissioner Rosch’s dissent is the more interesting document since he objects entirely on “public policy grounds” to the case being based even in part on Sec. 2 of the Sherman Act. He argues that it should have been grounded entirely on Section 5, stating, however, “the reach of Section 5, like any other statute, is not unlimited. I think the Commission can and should define those limitations as they apply to this case.” Concurring and Dissenting Statement of Commissioner J. Thomas Rosch, In the Matter of Intel Corporation, Docket No. 9341.

The Intel case will be very informative to the ongoing discussion over the reach and application of Section 5.

Parker Poe is counsel to Polypore International, Inc. in the FTC action and Eric Welsh was on the trial team.

Unfair Competition Claim Satisfies Twombly and Iqbal Standards

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Posted by Eric Welsh on December 9, 2009 – 3:39 pm
Filed under Federal Court, North Carolina law, Unfair Competition

Applying the pleading standards established under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949-52 (2009) to a UDTPA claim, the Magistrate Judge in Davis v. Beazer Homes, U.S.A., Inc., 1:08CV247 (Nov. 17, 2009, MDNC) recommended finding the plaintiff’s claim sufficient to withstand a motion to dismiss. In that case, the plaintiff alleged, among other things, that the defendants engaged in unfair trade practices under North Carolina law through their alleged sales practices involving certain incentive programs. The defendants moved to dismiss on several grounds, including that the plaintiff failed to plead a proper UDTPA claim.

In considering the motion, the court noted that under the standard set by the Supreme Court in Twombly, if the “allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should be exposed at the point of minimum expenditure of time and money by the parties and the court.” Bell Atlantic Corp. v. Twombly, 550 U.S. at 558 (internal quotation marks, punctuation and citations omitted). After citing to Judge Posner in the Asahi Glass Co. v. Pentech Pharms, Inc., 289 F. Supp.2d 986, 995 (N.D.Ill. 2003) case, the court then analyzed the pleading from a “plausibility” standard.

The court noted that the plaintiff maintained that the “deceptive or misleading” act was the alleged incorporation of the cost of her financial incentives into the total purchase price without disclosing that information to her. The court found “this bedrock allegation” an “adequate assertion in this case and ‘plausibility’ was sufficiently shown under all the circumstances of the case.” It is with respect to this latter point that the court refers to the existence of a deferred prosecution agreement (”DPA”), entered into by Beazer Homes and the U.S. Attorney’s Office, and a criminal information. The court, having reviewed the DPA and a related criminal information, found that “it appears that Beazer Homes has admitted some level of misconduct relating to ‘certain’ of its home sales, as least insofar as federal law is concerned.” The court considered this information “a significant factor in assessing ‘plausibility’ of Plaintiff’s UDTPA claim”, even though the DPA was not part of the amended complaint in the matter (or even in existence at the time). While a court is generally limited to the four corners of the complaint when reviewing the sufficiency of the allegations on a motion to dismiss, here the court apparently stepped outside of the complaint to consider this extraneous information, which had been submitted to the court by the plaintiff as part of another filing in that case. The court referred to other allegations of the complaint as well, but from the court’s opinion, the impact of the DPA is clear.

The Defendants have filed objections to the recommendation of the Magistrate Judge.

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