North Carolina Business Litigation Report

Court Of Appeals Rules That Partner's Self-Dealing Isn't "In Or Affecting Commerce" And Isn't An Unfair And Deceptive Practice

The Court of Appeals split today 2-1 on whether two partners with claims against a third partner for self-dealing and breach of opportunity could make an unfair and deceptive practices claim.  The case is White v. Thompson.  Judge Wynn wrote the majority opinion, and Judge Ervin dissented. 

The partnership was Ace Fabrication and Welding, the partners were White, Ellis, and Thompson.  Ace did several jobs for a large customer, but Thompson then secured a number of jobs from that customer on his own, without performing them with the partnership.

The other partners obtained a jury verdict on a breach of fiduciary duty claim, and were awarded damages of $138,195.  The trial court trebled the damages, but the Court of Appeals majority reversed. 

Its reasoning was that the claim was for a breach of partnership duties involving matters of internal management of the partnership, so the claim did not make out the "in or affecting commerce" requirement of a Section 75-1.1 claim.  It said that the Defendant's activities had indeed harmed the partnership, "but had no impact in the broader marketplace."

Judge Ervin saw things completely differently.  He said:

"Impairing the ability of others to compete for work in this fashion is tantamount to unfair competition, a type of conduct which is clearly actionable" as an unfair and deceptive practice.

"The effect of such conduct was to deprive the partnership of the ability to actually perform certain specialty fabrication jobs . . . a fact which clearly implicates the 'activities the business regularly engages in and for which it [was] organized.'"

"Depriving the partnership of the opportunity to perform these . . .  jobs inevitably affected its financial viability, producing an inevitable impact on competitive conditions in the market for the performance of . . . jobs in the area served by the partnership."

The North Carolina Business Court has faced the issue of what is "in or affecting commerce" on a number of occasions.

In Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008), Judge Diaz held that allegedly oppressive conduct by the majority member of an LLC in removing a manager and making capital calls didn't make out an unfair and deceptive practice because these were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs."

In Schlieper v. Johnson, 2007 NCBC 29 (N.C. Super. Ct. August 31, 2007), Judge Tennille held that the unfair and deceptive practices statute is not meant to apply to the internal affairs of business associations.This case was affirmed by the Court of Appeals.  It found that the claims of the Plaintiff were really claims in their status as employees, which were outside the scope of the statute.

In an unpublished decision, Kaplan v. O.K. TechnologiesJune 27, 2008, Judge Tennille found that LLC members couldn't pursue an unfair and deceptive practices claim, because "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders. Commerce is not affected by the parties' inability to work together as an LLC."  That opinion of the Business Court was affirmed by the Court of Appeals, though it didn't discuss the 75-1.1 issue. 

I hope the Plaintiffs in White accept their open invitation to have the Supreme Court decide the case.  The issue of when misconduct goes beyond a matter of "internal corporate governance" and begins to be "in or affecting commerce" so as to make out an unfair and deceptive practices claim has ramifications for all kinds of business entities. 

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Junius B. Lee, III - July 13, 2009 8:50 AM

Thank you for your e-mail of several weeks ago. It would have made by brief substantially better. This is a fabulous blog - it should be required reading for anyone who does any commercial litigation. I just wish I had seen this edition of the blog before I submitted my brief. I will not make that mistake again.

Mack Sperling
Brooks Pierce, LLP
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