[co-author: Ryan Lipes]
Imagine that an out-of-state company causes an injury to someone in North Carolina, but does so only through acts outside North Carolina. Can the plaintiff use N.C. Gen. Stat. § 75-1.1 to seek treble damages and attorney fees?
Two judges on the same federal court have recently given opposite answers to this question. This disagreement shows how important it is to understand the territorial reach of section 75-1.1.
The Territorial Limits of Section 75-1.1
The original text of section 75-1.1 implied that the statute applied only to acts inside North Carolina. In 1977, however, the General Assembly replaced the language that seemed to limit section 75-1.1 based on where the defendant’s conduct occurred.
Thus, as a matter of statutory text alone, it now seems possible for a party to pursue a 75-1.1 claim based on out-of-state conduct. A claim could arise, for example, if a company’s out-of-state actions caused North Carolina consumers to pay an artificially high price for goods. A claim might also arise if a company made out-of-state false statements that North Carolina parties relied on to their detriment.
Of course, statutory language and constitutionality are two different things. In the years after the 1977 amendment, defendants began to argue that applying section 75-1.1 extraterritorially violates the dormant Commerce Clause, as well as due process.
The first major decision to take up these arguments was American Rockwool, Inc. v. Owens-Corning Fiberglas Corp. In that 1986 case, a North Carolina plaintiff sued an out-of-state defendant based on a multistate campaign of business disparagement. In that context, the U.S. District Court for the Eastern District of North Carolina held that applying the substance of section 75-1.1 was not a constitutional violation of any kind.
The court went on to decide, however, that applying the treble-damages remedy for section 75-1.1 to out-of-state conduct would be unconstitutional. The court held that it could award treble damages only for “conduct occurring in North Carolina which occasioned damage to the plaintiff” (emphasis added).
A year later, the Middle District of North Carolina took these extraterritoriality concerns a big step further. The “In” Porters, S.A. v. Hanes Printables, Inc. involved the converse of American Rockwool: An out-of-state plaintiff sought to apply section 75-1.1 to a North Carolina defendant over conduct that occurred entirely out of state—indeed, in Europe.
Applying section 75-1.1 under these circumstances troubled the “In” Porters court. The vague standards for liability under section 75-1.1 and the treble damages available under the statute meant only pain for the North Carolina parties in the case (the defendants). The party who would benefit from these features of section 75-1.1, in contrast, was a French company. Against this background, the court wrote, “Such a sweeping, punitive cause of action should not be given an extended extraterritorial reach, lest notions of fairness be clipped.”
Based on these fairness concerns, the “In” Porters court stated a two-part test to limit the extraterritorial use of section 75-1.1:
First, the plaintiff must suffer an injury in North Carolina.
Second, the in-state effect on the plaintiff must be “substantial.”
Unless both of these tests are satisfied, the court held, one cannot apply section 75-1.1 to out-of-state conduct. Note that this test bars applying any part of section 75-1.1, not just the treble-damages remedy, as in American Rockwool.
When later courts have considered applying section 75-1.1 to conduct outside North Carolina, they have generally followed the “In” Porters analysis. Interestingly, though, most of these later cases have not involved the “In” Porters lineup of parties. Instead, they have involved the American Rockwool lineup: North Carolina plaintiffs who sue out-of-state defendants over alleged in-state injuries.
Perhaps because of this dissonance, courts have had trouble applying the “In” Porters analysis consistently.
Tomorrow, we’ll discuss these inconsistent decisions in part II of this post.