When do treble damages need a passport? In a Middle District opinion Wednesday, the Court held that a foreign plaintiff may assert an unfair and deceptive trade practices claim in North Carolina under certain circumstances.
Ada Liss Group (2003) v. Sara Lee Corp. (M.D.N.C. No. 06-CV-610) involved a decade-long dispute between North Carolina’s hosiery manufacturer and its exclusive distributor of certain products in Israel. Under a 1994 Distributorship Agreement, Ada Liss bought the exclusive right to distribute Bali-branded women’s intimate apparel to retailers in Israel. (Although we at this blog normally include a topically appropriate image with every post, we’ll exercise some restraint and discretion on this one). Sara Lee agreed not to sell such products to anyone else in Israel or to sell them to anyone whom Sara Lee "knows or has reason to believe is likely to resell or deliver the Products to customers located in the Territory."
Beginning in 2000, Ada Liss noticed Bali imports other than its own in the Israeli marketplace ("parallel imports"), apparently the result of a Sara Lee distributor in Miami who purchased the products from Sara Lee at prices far lower than those charged to Ada Liss. Later, a New York distributor began distributing the same products in Israel.
Sara Lee and Ada Liss entered into a Settlement Agreement and a 2004 Distributorship Agreement. Under those agreements, Sara Lee agreed to "mark" products sold to the other distributors in order to determine the source if those products showed up in Israel. Ada Liss, in turn, released its claims against Sara Lee from 1994 through the date of the Settlement Agreement.
The parallel imports problem continued, however. Ada Liss sued under various contract and tort theories, alleging that Sara Lee was not marking the products, never intended to do so, and fraudulently induced Ada Liss to enter into the two 2004 agreements only to obtain the release of a multi-million dollar liability. Ada Liss further alleged that Sara Lee continued to sell Bali products to the other distributors with actual knowledge that those distributors were sending the products to Israel. The matter came before Judge Tilley on the parties’ respective objections to a report and recommendation of Judge Dixon on Sara Lee’s motion to dismiss and Ada Liss’s motion for partial summary judgment.
Ada Liss asserted a Chapter 75 claim for unfair and deceptive trade practices based on allegations of Sara Lee’s deceptive conduct as well as allegations of common law fraud. Sara Lee challenged the Court’s subject matter jurisdiction over this claim based on an earlier Middle District decision, The "In" Porters, S.A. v. Hanes Printables, Inc., 663 F. Supp. 494 (M.D.N.C. 1987). In "In" Porters, Judge Gordon held that a foreign plaintiff may not assert a Chapter 75 claim in North Carolina absent "a substantial state interest in the litigation such that application of North Carolina’s law is ‘neither arbitrary nor unfair,’" which in turn required a showing of "’a substantial effect on the plaintiff’s in-state operations’" (emphasis in original) to trigger the jurisdictional requirements of North Carolina’s long-arm statute. The dispute in "In" Porters concerned an exclusive distributorship in France for products purchased from a defendant’s Belgian subsidiary. Although there were negotiations in North Carolina, none of those negotiations were tainted by fraud or gave rise to the Chapter 75 claim.
In Ada Liss, Judge Tilley affirmed that "In" Porters was still good law, but distinguished it on the facts. As he described the earlier case, "The problem for the ‘In’ Porters plaintiff was that the record showed exclusively foreign misconduct with damages to the plaintiff’s exclusively foreign operations." In contrast,
where Sara Lee–itself a North Carolina resident–is alleged to have committed fraud in North Carolina against Ada Liss, the question of extra-territorial application of the UDTP statute, which was fatal to the UDTP claim in ‘In’ Porters, is simply not at issue. Because the conduct alleged took place in North Carolina, the court does not have to search for an impact on the Plaintiff’s state operations or a strong state interest. There is no inquiry into the sufficiency of Plaintiff’s relationship to North Carolina in a case involving local acts under 1-75.4(3).
There were four other legal issues of note in the opinion. First, both the 1994 and 2004 Distributorship Agreements contained an exculpatory clause for incidental or consequential damages and lost profits, but the Court rejected Sara Lee’s attempted application of the clause to willful or intentional conduct. The clause applied to contractual claims and, under certain circumstances, could have applied to ordinary negligence claims, but an exculpatory provision for intentional wrongdoing "not only lacks clear textual support in the agreement, it also has no basis in contract law and defies sound public policy." The Court considered the absence of North Carolina case law on the subject to be a function of the clarity of the rule:
[T]he issue is so obviously contrary to sound law and policy that courts simply have not written opinions on the subject. The precedent created if contracts with exculpatory clauses for intentional torts became enforceable would be noxious. Parties could simply circumvent tort law altogether, eliminating the natural check on intentional misconduct that comes from the potential for extensive tort liability.
Second, the Court held that Ada Liss stated a claim for fraud and negligent misrepresentation in addition to its contract claims. Although the economic loss doctrine prevents tort recovery for purely contractual claims, the Court concluded that Ada Liss’s allegations were sufficient to support its tort claims because they suggested a fraudulent scheme that commenced before the formation of a contract between the parties.
Third, the Court rejected Ada Liss’s separate claim for breach of the covenant of good faith and fair dealing, holding that there was no "special relationship between the parties" that would give rise to such a claim independent of a breach of contract claim.
Finally, Judge Tilley adopted the Magistrate’s recommendation to award summary judgment to Ada Liss on the issue of breach of the 2004 Settlement Agreement for failure to mark products sold to third parties as required by the agreement.