Joshua Langley worked for Autocraft, Inc. for more than five years and rose to have wide access to its business affairs and “substantial responsibility for its overall operations.” While still employed there, he opened LB Metalworx, LLC to compete with his employer in the provision of precision machined components. In Langley v. Autocraft, Inc., 2023 NCBC 53, the Business Court weighed Langley’s suit for breach of his employment agreement after Autocraft fired him for allegedly directing customers and other work to LBM.

The Business Court granted Langley’s Rule 12(c) motion to dismiss Autocraft’s counterclaims for breach of fiduciary duty, constructive fraud, and unfair and deceptive trade practices. Judge Earp’s decision analyzed some of the most frequently sought, but seldom granted, claims the Business Court confronts in employer-employee relationships gone sour.

Breach of Fiduciary Duty

Because a fiduciary duty doesn’t “arise between an employee and his or her employer by operation of law,” a litigant is left to thread the very narrow needle that “only in rare circumstances does such a duty arise from the particular facts of an employment relationship.” Id. ¶ 40. Autocraft contended Langley fit the exception because he oversaw its facilities, developed relationships with its customers, managed employees, and dealt with suppliers. Moreover, it alleged he had access to confidential and proprietary information about Autocraft machinery, customers, marketing, and pricing. Id. ¶¶ 13-14.

It wasn’t a particularly close call for the Court. Reminding that “[i]t is insufficient to allege mere influence over another’s affairs,” it noted that de facto fiduciary relationships exist “[o]nly when one party figuratively holds all the cards – all the financial power or technical information, for example.” Id. ¶ 39. The Court accepted that Langley was “undoubtedly important as a manager of the enterprise but found the counterclaim lacking in allegations that Autocraft was “subjugated” to Langley’s “improper influence or dominion.” Id. ¶ 43 (quoting Dalton v. Camp, 353 N.C. 647, 652 (2001)). “Indeed,” Judge Earp noted, “our Supreme Court has observed that, as a general proposition, such a scenario would be unlikely.” Id.

Unfair and Deceptive Trade Practices

There certainly is a visceral appeal to the argument that it must be unfair and deceptive to divert customers and business opportunities to a third party that will profit, “in commerce,” from the maneuver. In what is now a long series of decisions, the Business Court has made it plain that is not often true under North Carolina law. A litigant like Autocraft has a hefty burden to show that Langley’s conduct was not simply “inside baseball” behavior whose impacts were contained within the company. “The UDTPA does not apply to unfair or deceptive conduct contained within a single business because the conduct has no impact on the marketplace and therefore is not ‘in or affecting commerce.’” Id. ¶ 59. See Nobel v. Foxmoor Grp., 380 N.C. 116, 121 (“The internal operations of a business entity are not within the purview of the Act.”).

Autocraft’s allegations of unfair and deceptive acts included claims that Langley concealed LBM’s provenance and activities, usurped corporate opportunities, misappropriated confidential information, and engaged in self-dealing. But the failure for purposes of pleading under Chapter 75 was with where this conduct was directed (Id. ¶¶ 60-61):

“The fundamental weakness in Autocraft’s pleading is that the wrongs Langley allegedly committed are alleged to have harmed Autocraft itself, not external market participants.”

The Court noted that the existence of LBM as an entity created for the purpose of receiving benefits from Langley’s conduct “does not transform the misconduct into” behavior covered by Chapter 75. “The mere presence of [a separate entity] as a potential beneficiary of [the] alleged wrongful conduct does not alter the fundamental character of [an] internal dispute.” Id. ¶ 62 (quoting Poluka v. Willette, 2021 NCBC 74, 2021 WL 5711755, *6 (N.C. Super. Ct. Dec. 2, 2021)).

Takeaways

• The Business Court continues to construe Sara Lee Corp. v. Carter, 351 N.C. 27 (1999), narrowly for litigants who see it as a path around Nobel. In Sara Lee, an employee created entities that interacted directly with Sara Lee as outside vendors, and it constituted harm “to the flow of commerce between” separate market actors. Here, the Court found LBM was “used merely as an instrument or ‘shell’ to facilitate harm within” Autocraft. Langley, ¶¶ 62-63 (quoting Howard v. IOMAXIS, LLC, 2021 NCBC 82, 2021 WL 6067530, *11 (N.C. Super Ct. Dec. 22, 2021).

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