North Carolina Law Review

University of North Carolina School of Law

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Chapel Hill, NC 27514

Bank Sales and Bake Sales: Section 75-1.1 and the HAJMM Legacy

January 9, 2019

97 N.C. L. Rev. 163 (2018)

 

The owner of Fair Play Bakery (“Fair Play”) decides he has had enough of the pastries and that it is time to sell his whole bakery. Fortunately, We Pastry Inc. (“We Pastry”), a national baking chain, feels that the layout and products of Fair Play are unique and worth copying, and the national baking chain quickly draws up a stock purchase agreement to acquire Fair Play. After both parties execute the stock purchase agreement, Fair Play changes its name to We Play Fair and continues operating at a considerable, but less-than-projected, profit. We Pastry, ever mindful of its profit margins, decides to claw back some of its purchase price by demanding $200,000 out of an escrow account that was set aside to indemnify We Pastry if it suffered a loss due to undisclosed weaknesses in Fair Play’s business. The terms of the stock purchase agreement contemplate that We Pastry assumes the responsibility for We Play Fair’s continued success, so a demand on the purchase price is sharp dealing but also arguably deceptive and unfair.

 

However improper We Pastry’s activity may appear on its face, North Carolina’s “unfair or deceptive practices” statute, commonly known as section 75-1.1, will be unavailable to the baker of Fair Play if he tries to sue for the $200,000 he is due under the stock purchase agreement. Section 75-1.1 is inapplicable—not because North Carolinians would consider We Pastry’s activity fair or would think that the baker should pursue litigation under securities laws but because courts have held that section 75-1.1 does not apply to securities transactions. If We Pastry deceived customers about its purportedly gluten-free croissants, it could be liable for treble damages and attorneys’ fees, but because it unfairly deprived a baker of $200,000 under a stock purchase agreement, the statute punishing unfairness does not apply.

 

This hypothetical touches on a key issue in section 75-1.1 cases: At what point does business activity become commerce that affects, and potentially injures, consumers? Section 75-1.1 would apply to unfair or deceptive acts in Fair Play’s sale of pastries to a customer because that conduct is undoubtedly consumer related. Courts and lawyers have more difficulty, however, in applying section 75-1.1 to situations that do not involve an injury to an everyday customer. Much of this difficulty arises when section 75-1.1 collides with regulatory structures designed to address fraud or unfairness in particular legal contexts, such as securities laws. A claim under such regulatory structures also generally does not fall within the scope of section 75-1.1 when the regulations adequately address the issue and occupy the field. But when a plaintiff cannot otherwise address unfairness in their business dealings, section 75-1.1 is intended to provide an effective and necessary means of doing so. For more than a quarter century, however, the Supreme Court of North Carolina has left the law in limbo and undermined its potential as a remedial backstop when regulatory schemes do not apply.

 

This Comment aims to define the contentious boundary between section 75-1.1  jurisprudence and more pervasive regulatory structures to demonstrate unworkable gaps in the law, focusing particularly on securities transactions. This discussion highlights the potential of section 75-1.1 as a tool to address unfairness when regulations fail to provide a remedy for a particular type of misconduct. While many regulatory agencies and laws are finely tuned to the field they regulate, their application cannot extend beyond that field. Section 75-1.1 provides an opportunity to address misconduct that falls between regulatory cracks. The discussion below aims to articulate this role of section 75-1.1 as a regulatory backstop, not a regulatory alternative, using the case law surrounding securities transactions as a template.

 

 

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