4th Circuit High-Fives Georgia Pacific in enMotion Towel Dispenser Case

If you have visited the restroom in an office building in the last five years, chances are you've had the opportunity to use Georgia Pacific's hands-free paper towel dispenser known as "enMotion."  In a published opinion released yesterday, the Fourth Circuit generally ruled in GP's favor on trademark infringement, tortious interference, and unfair and deceptive trade practices claims.

The enMotion dispenser (pictured here) operates through an electronic motion sensor that dispenses towels without any physical contact from the user's hands.  The dispenser was designed for use with a proprietary paper towel sold exclusively by GP, one that the Fourth Circuit described as having "a soft-fabric like feel created by using a through-air-dried (TAD) process."  (Our own end-user experience confirms that these towels are quite supple, as commercial paper towels go).  The dispensers are not sold, they are leased to distributors, who are permitted to sub-lease them to end-users (like office buildings).  The leases and subleases require the end users to use only GP's towels in the dispensers.  The towels themselves are a non-standard size.

The defendant designed and manufactured a competing paper towel in the exact same non-standard size, but with a "slick, scratchy feel," and marketed it to users of the enMotion dispensers.  Those towels did not fit any other dispenser on the market.

GP sued in the Eastern District for trademark infringement, Lanham Act and common law unfair competition, and tortious interference with contract, and the defendant counterclaimed for unfair and deceptive trade practices.  Judge Boyle granted summary judgment in favor of the defendant on GP's claims and in favor of GP on the defendant's unfair & deceptive counterclaim.

The Fourth Circuit vacated and remanded everything except the counterclaim.  Without delving too deeply into the trademark issues, suffice it to say that the court was convinced that a fact issue existed due to statistical evidence of substantial consumer confusion as to the source of the towels, combined with evidence of the defendant's intent to "stuff" the GP dispensers with its own towels.

As for the tortious interference claim, the district court ruled that the defendant's conduct was legitimate competition and was therefore justified, creating a qualified privilege under North Carolina law.  The Fourth Circuit vacated that ruling with two caveats.  First, GP's claim would be limited to tortious interference with contracts between GP and its distributors because GP did not have contractual relations with the end users themselves.  Second, GP could prevail only if it also prevailed on its trademark claims.  Success on those claims would make the defendant's conduct illegal, which would destroy the qualified privilege.

Finally, the Fourth Circuit affirmed the dismissal of the defendant's unfair & deceptive trade practices counterclaim (describing the district court's reasoning with the Blackstonian phrase "right on the money").  Although the defendant claimed that GP's attempts to exclude other towel manufacturers from its dispensers was unfair or deceptive, the court held that GP entered into its leases "in good faith, openly, and transparently."  Moreover, the defendant had shown no actual injury because it had been successful in competing with GP in the marketplace.

Full Opinion

Ruling That Competition Is A "Fact Of Life In A Market Economy," Fourth Circuit Affirms Summary Judgment On Tortious Interference Claim

What do you get when you mix together a luxury automobile, a tiger, and a wind tunnel?

It sounds like something out of the movie The Hangover, but it's the case of BCD LLC v. BMW Manufacturing Co. LLC, an unpublished decision from the Fourth Circuit Court of Appeals.

BMW and Clemson University were developing a new Graduate Engineering Center. Plaintiffs wanted to build a wind tunnel facility -- catering to the racing industry -- as a part of the Center. They claimed that BMW and Clemson had tortiously interfered with their efforts.

The threshold issue addressed by the decision was whether the Plaintiffs had a valid and enforceable contract with which the Defendants could have interfered. The Court found that they had at best an "agreement to agree" which had never risen to the level of an enforceable agreement. In the absence of a contract, Plaintiffs couldn't pursue a tortious interference claim.

The Court also found the conduct by BMW which Plaintiffs said constituted tortious interference to have been competitively justified.  It said that "at all times, BMW acted in pursuit of its legitimate interests in founding an educational partnership with Clemson," and held as follows:

The only harm that BMW may have intended to cause [the Plaintiffs] was the incidental harm to a competitor that is necessarily part of all business competition. That increased benefits for one entity may come at the expense of a competing entity is merely a fact of life in a market economy. Consequently, although a party cannot interfere with a contract because of malice or spite, it is altogether legitimate for BMW to engage in business competition with [Plaintif's] entities.

That's a quote that may prove useful if you are defending against a tortious interference claim.

Tortious Interference Claim Against Lender Dismissed By North Carolina Business Court

Today in Torres v. The Steel Network, Inc., 2009 NCBC 19 (N.C. Super. Ct. July 27, 2009), the Business Court dismissed a tortious interference claim against Bank of America, ruling that the Bank couldn't be sued under that theory for exercising its rights under its loan documents.

Plaintiff, a shareholder in the Defendant The Steel Network (TSN), had entered into an agreement  to sell his minority interest to the Company for $4 million. The promissory note entered into in connection with the stock redemption called for payments to be made over a three year period.

Bank of America took the position that the the terms of the note violated debt service covenant ratios in its loan agreement with the Defendant. The Bank said it would call its loan to the company if the debt wasn't subordinated or if the transaction wasn't repudiated by TSN. TSN backed out of the deal with the Plaintiff before ever making a payment on the note. The Plaintiff then sued the Bank for tortious interference with contract.

Judge Jolly granted the Bank's motion to dismiss, holding:

Here, the Complaint and its exhibits show that execution of the Note threatened to place TSN in violation of its pre-existing contractual covenants with the Bank. The documents of record also establish that the purported actions of the Bank were motivated by justifiable interests in protecting pre-existing legitimate contractual interests between TSN and the Bank, and that the Bank's actions were proper and proportionate to the interests it sought to protect.

Op. ¶11.

The Court held that boilerplate allegations that the Bank had acted "without justification" weren't sufficient to get past a motion to dismiss, because the loan documents and other documents presented to the Court "support no conclusion other than that the Bank was acting pursuant to its contractual rights arising from its loan agreements with TSN."

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

Business Court Dismisses Claims Arising From City Of Charlotte Construction Project

The Business Court ruled today in Crowder Construction Co. v. City of Charlotte, a construction law case, that North Carolina does not recognize the "cardinal change doctrine."  It also dismissed a claim that a project consultant had tortiously interfered with the contract between the general contractor and the City by rejecting the general contractor's claims for payment.

A "cardinal change" is a change to a government contract which "fundamentally alters the contractual undertaking of the contractor."  It is a change which "cannot be redressed within the contract by an equitable adjustment to the contract price."

Crowder was the general contractor for a parking garage for the City of Charlotte.  It claimed that "after it began work on the Project, it discovered that the soil conditions at the site differed greatly from those represented in the Bid Documents and that these changed conditions resulted in significant additional work and expense. . . ."  Crowder sued to recover these additional expenses, claiming that the unanticipated soil conditions were a cardinal change.

Judge Diaz dismissed the claim, stating that it was "not recognized in North Carolina."  He ruled that a claim for cardinal change was essentially a claim for breach of an implied contract, and that such a claim was barred by the doctrine of sovereign immunity.

Also dismissed was a claim by Crowder for tortious interference with contract against  STV, the City's "Project Management Support Services Consultant."  Crowder claimed that STV had interfered with Crowder's contract by failing to properly administer the contract and by refusing to negotiate proper payment for Crowder.

The Court held that the "interference" was justified, even though Crowder had specifically alleged that it was not.  Judge Diaz ruled that Crowder's allegation as to the lack of justification was "a legal conclusion the Court need not accept," and that Crowder's allegations on this point were self-defeating.  Crowder had referenced STV's contract, which showed that it had been contractually authorized to review and approve change orders, and had asserted that STV was responsible for evaluating the validity of any claims made in connection with the Project. 

The Court determined that STV had a proper motive -- the performance of its own duties under its own contract with the City -- in how it had dealt with Crowder.  Thus, the Court concluded, STV's actions were "reasonably related to the protection of a legitimate business interest," and it dismissed Crowder's tortious interference claim.

Brief in Support of Motion to Dismiss (Cardinal Change Issue)

Brief in Support of Motion to Dismiss (Tortious Interference Issue)

Brief in Opposition to Motion to Dismiss (Tortious Interference Issue)

Reply Brief in Support of Motion to Dismiss (Cardinal Change Issue)

A Summary Of Tortious Interference With Contract Cases In The North Carolina Business Court

I'm writing this post about the Business Court's past decisions involving tortious interference with contract because "tortious interference" is one of the most common searches leading readers to this blog. 

So, here's a summary of more than a dozen Business Court decisions which involve that tort, with links to the summaries of the cases on this blog, which in turn have links to the full opinion and also to the briefs if they were available. 

Tortious interference claims survived dispositive motions in these cases: 

In Webb Builders, LLC v. Jones, January 24, 2002 (unpublished), a homebuilder was pursuing tortious interference claims against a dissatisfied customer.  The customer had complained to others for whom the builder was working, and some of those customers had terminated their relationships with the builder.  The customer also complained to prospective customers, some of whom declined to do business with the builder.  The Court considered the factors set out in the Restatement (Second) of Torts §767, which include "(a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference, and (g) the relations between the parties." The Court held that this tort does not require a showing of of force, or threat, or intimidation, and also that it does not require independently tortious conduct.

In Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2002 NCBC 4 (N.C. Super. Ct. July 10, 2002), the Court engaged in a thorough discussion of the tort of interference with prospective economic advantage (or prospective economic relations) and let survive a claim between two competitors.  It found that there were issues of fact "whether defendants prevented plaintiff from making contracts by means other than legitimate methods of competition."  Those facts, generally, involved the defendant's use of the plaintiff's confidential information and a deliberate pattern of undermining the plaintiff's business.  The Court also allowed a claim for tortious interference for the manner in which defendant had recruited plaintiff's employees.  (The Sunbelt case, which was affirmed by the North Carolina Court of Appeals, is probably the most significant North Carolina case involving tortious conduct between competitors).

In CNC/Access, Inc. v. Scruggs, 2006 NCBC 20 (N.C. Super. Ct. Nov. 15, 2006), the Court found issues of material fact whether the plaintiff had interfered with the defendant's prospective relationships with certain customers.  The Court dismissed plaintiff's claims for tortious interference, finding that the covenants not to compete on which those claims were based were unenforceable.  The parties were competitors.

The Business Court has dismissed tortious interference claims on multiple occasions, including cases involoving lenders, competitors, trust beneficiaries, and insurance agents:

In Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997), the Court held that there was no tortious interference claim by a junior lender against a senior lender which had required the borrower to sell off its collateral in order to pay down the senior debt.

In Praxair v. Airgas, Inc., 1999 NCBC 5 (N.C. Super. Ct. May 26, 1999) and Praxair v. Airgas, Inc., 1999 NCBC 9 (N.C. Super. Ct. Oct. 20, 1999), the Court dismissed a tortious interference claim between competitors.  It held (in the second opinion) that "absent proof that a competitor has acted maliciously or otherwise unlawfully, courts should be reluctant to impose liability for conduct that can be characterized fairly as legitimate competition."  The defendant therefore had a legitimate right to bid to acquire a business in which plaintiff had a right of first refusal.  The Court let survive, however, a tortious interference claim that the defendant had enouraged others to breach their rights to the plaintiff under that right of first refusal.

In Staton v. Brame, 2001 NCBC 5 (N.C. Super. Ct. May 31, 2001), the Court dismissed a tortious interference claim against the beneficiary of a charitable trust who had terminated a contract between a foundation formed by the trust and the defendant.  The Court noted the differing treatment under North Carolina for "outsiders" and "non-outsiders" to contracts, and determined that plaintiff was a non-outsider who had acted with what she believed was a legitimate interest in protecting her trust income, and who therefore had a qualified right to terminate the contract in question..

In Hinson v. Trigon Healthcare, Inc., August 23, 2001 (unpublished), the lawsuit was between parties in the business of insurance.  Defendant had sent letters to persons for whom the plaintiffs, insurance agents, had written policies informing them that it was exiting the business and that they should find substitute insurance.  The Court held that the defendant had a "legitimate business purpose in sending the letters" so that its policyholders could avoid gaps in their coverage, and dismissed the tortious interference claim. 

The case of Durham Coca-Cola Bottling Co. v. Coca-Cola Bottling Co., 2003 NCBC 3 (N.C. Super. Ct. Apr. 28, 2003) involved a letter of intent, which the Court found to be an agreement to agree at a future date, and subject to a future, more complete acquisition agreement.  The letter of intent therefore could not form the basis for a tortious inteference claim.  The Court went on to say, however, that summary judgment would have been appropriate in any event on the basis of justification. The defendant, a competitor of plaintiff, was competing with plaintiff for the purchase of the business in question and plaintiff therefore could not show that it was acting with bad faith or malice so as to justify its tortious interference claim.

In Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), the claim was dismissed because the action was between two competitors, and the Court held that interference with contract is justified if motivated by a legitimate business purpose, as when the parties are competitors.

In Epes v. Healthsouth Corp., February 8, 2008 (unpublished), the Court dismissed the claim because it found that the contract upon which the claim was based lacked mutual assent as to material elements necessary to create an enforceable contract, including the price to be paid, identification of the parties, and the subject matter of the contract. The letter merely expressed the intent and desires of the parties, rather than their agreement.

In Webb v. Royal American Company, LLC, March 17, 2008 (unpublished), the Court dismissed a tortious interference claim against a lender.  Although Plaintiffs had recited all of the elements of that claim, the face of the complaint demonstrated that there was a valid business justification for the Defendant's actions.  The Court held that a lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff must make something more than conclusory allegations about justification. 

In Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc., June 19, 2008 (unpublished), the Court granted a motion to dismiss a tortious interference claim between the plaintiff and its former supplier.  The plaintiff alleged that the defendant had acted improperly by selling product to plaintiff's competitor.  The Court held that the defendant "had the right to do so," and that "competition does not in and of itself represent tortious interference."  The Court held that it is a legitimate justification to seek business from common customers.   

 

Tortious Interference And Negligent Misrepresentation Claims Dismissed

The Business Court today granted in part, and denied in part, a Motion to Dismiss in Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc. Judge Tennille ruled on claims of tortious interference with prospective economic advantage, negligent misrepresentation, and misappropriation of trade secrets, among others.

Plaintiff (Gateway) alleged that the Defendant (ALT) sold it faulty lubricant which was used by automobile and truck dealers to which Plaintiff sold warranties.  The lubricant allegedly turned out to be defective, and Gateway claims it was called upon to pay substantial warranty claims.  

The parties stopped doing business with one another, and ALT then began selling the same lubricant, under a different name, to Gateway's competitor.  According to Gateway, ALT gave the competitor a list of Gateway's customers which it used to solicit business.

The Motion to Dismiss was granted as to the tortious interference claim, which asserted that Gateway had lost business as a result of ALT's sale of lubricant to the competitor.  The Court held that:

ALT sold product to a competitor of Gateway. It had the right to do so. Competition does not in and of itself represent tortious interference; rather it is a legitimate justification for seeking business from common customers. Here it is even one step removed since ALT sold product to Gateway’s competitor.

It is . . . clear that the complaint does not adequately allege interference with prospective economic advantage. To do so the complaint must allege interference with a trade or business by maliciously inducing a person not to enter into a contract with a third person, which he would have entered into but for the interference. A legitimate exercise on a person’s rights cannot support a claim for interference with prospective economic advantage.

The negligent misrepresentation claim was dismissed because Gateway's claims were for breach of warranty and covered by the UCC, and also because of the economic loss rule.  Judge Tennille held:

This is a breach of warranty case. The complaint alleges any statements were made in the course of the contractual representation. It fails to establish any independent duty running from ALT to Gateway. To substitute negligent misrepresentation for breach of warranty under the circumstances of this case would eviscerate the pertinent sections of the UCC. Both the negligent misrepresentation claim and the negligence claim in Count VI are barred by the economic loss rule. Both are based upon a breach of contract or warranty and the recovery is limited to the contract or warranty claim. Our Court of Appeals has held that: “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract.” Spillman v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741 (1992).

Finally, the trade secrets claim survived the Motion to Dismiss. The Court held that "[c]ustomer lists may or may not be trade secrets depending on the circumstances and the use made of them," and held that discovery on this claim would be necessary.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss