The “Securities Transaction” Exception: A Potent Defense To UDTP Claims

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What exactly is the “securities transaction” exception to a UDTP claim?  As highlighted by the Business Court’s recent decision in Aym Technologies, LLC v. Scopia Capital Management, LPC et al., 2021 NCBC 20B (N.C. Super. Ct. Mar. 31, 2021), it can be a potent defense against the UDTP claims we see litigated—perhaps too frequently—in the Business Court and elsewhere across the state.

 A.    What is the “Securities Transaction” Exception?

For those unfamiliar with it, the securities transaction exception operates essentially as a defense to a UDTP claim.  Where applicable, it effectively removes the subject transaction from the purview of G.S. § 75-1.1, the statute that creates and governs UDTP claims, by defeating the “in or affecting commerce” element of a UDTP claim.

But why?  The rationale for the securities exception is simple enough: securities transactions are heavily regulated, both federally (under the Securities Acts of 1933 and 1934) and at the state level (under the North Carolina Securities Act).  Given this “pervasive and intricate regulation,” our courts have reasoned that private enforcement under § 75-1.1 (in the form of a UDTP claim) is unnecessary or superfluous.  Skinner v. E.F. Hutton & Co., Inc., 314 N.C. 267, 275 (1985).

Courts also have applied the exception in a second instance—where the transaction in question is an “extraordinary” business event, such as a company’s issuance or redemption of its stock.  HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594 (1991).  The idea is that a UDTP claim requires a transaction “in or affecting commerce,” i.e., “regular, day-to-day business activities,” and extraordinary events are not regular business activities.  See id.  (One might also argue that at least some stock issuance and redemption transactions involve intra-company disputes, which typically fall outside the UDTP sphere because they are not “in or affecting commerce.”  See, e.g., Potts v. KEL, LLC, 2018 NCBC 24 ¶ 33 (N.C. Super. Ct. Mar. 27, 2018) (collecting cases holding that intra-company disputes do not support a UDTP claim)).

Applying these concepts, North Carolina courts consistently have held that transactions involving securities are outside the scope of G.S. § 75-1.1, and consequently cannot form the basis of a UDTP claim.  See, e.g., Skinner, 314 N.C. 267 (conceiving securities exception based on “pervasive” regulation rationale articulated with respect to commodities transactions in Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414 (1978), cert. denied, 296 N.C. 583 (1979)); HAJMM Co., Inc., 328 N.C. 578; Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52 (2001); White v. Consolidated Planning, Inc., 166 N.C. App. 283 (2004); Latigo Investments II, LLC v. Waddell & Reed Financial, Inc., 2007 NCBC 17 (N.C. Super. Ct. May 22, 2007).

A straightforward test has emerged: “the question is whether the transactions at issue involve securities or other financial instruments involved in raised capital.”  White, 166 N.C. App. at 304.  If so, the securities transaction exception applies.  Id.

B.   The Business Court Applies the Securities Transaction Exception in Aym Technologies.

Chief Judge Bledsoe applied the securities transaction exception in Aym Technologies.  (We have previously written on this litigation here.)  The plaintiff there moved to dismiss the defendants’ UDTP counterclaim, which alleged that the plaintiff had “misrepresented and failed to disclose material information” during negotiations that were “for the purpose of raising investment capital.”  Aym Technologies, 2021 NCBC 20B ¶ 58.  The Court made quick work of the UDTP claim, holding that because the alleged misrepresentations had been made as part of the capital-raising process, “the security exception applies.”  Id.

Although seemingly straightforward, the Court’s analysis of the securities transaction exception highlights an important point:  the exception may defeat a UDTP claim if either of the two “rationales” for the exception are present.  The Court indicated as much in addressing the defendants’ argument that the exception should not apply because raising capital was part of their day-to-day business activities (i.e., it was not an “extraordinary” event).  The defendants argued, essentially, that because their capital raising was a regular business activity—and therefore “commerce” within the meaning of G.S. §  1-75.1—the “in or affecting commerce” requirement was met.  The Court disagreed.  It explained that even if capital raising were a regular business activity of the defendants, it did not change the fact that their “investment solicitation of [the plaintiff] and any purchase and sale of investment securities that might have followed [were] likewise subject to extensive state and federal securities regulation.”  2021 NCBC 20B ¶ 59.

Stated differently, and framed in terms of the two “rationales” for the securities transaction exception described above, the Court’s analysis in Aym indicates that the exception will apply to foreclose a UDTP claim if either:  (1) a separate enforcement regime exists (e.g., the NC or federal securities acts) to regulate the subject transaction; or (2) the transaction constitutes an extraordinary event, i.e., is not a regular business activity.  And because the first rationale was present in Aym, the analysis ended there and it was of no consequence whether the second rationale also existed.

C.   What Does This Mean for UDTP Claims?

UDTP claims are frequently litigated in North Carolina, to say the least. As the Aym plaintiff pointed out, courts have taken note of the sometimes detrimental impact of such claims on litigation and even settlement prospects.  See Brewster v. Powell Bail Bonding, Inc., 2018 WL 74 ¶ 36 (N.C. Super. Ct. July 26, 2018) (observing that the “routine addition” of UDTP claims “driv[es] up the cost of litigation, tax[es] the resources of the Court, and expos[es] the plaintiff to a potential award of attorney fees” while “imped[ing] settlement discussions by introducing remedies (including treble damages) that would otherwise be unavailable, thereby distorting the parties’ incentives and their perceived risks”).

Given this reality, any arrow in the defense quiver is valuable not just to the defense but also to the courts in weeding out “add-on” UDTP claims and to the parties in working toward a resolution of their disputes.  The Business Court has reminded us that the securities transaction exception is one such arrow, representing a potent defense against UDTP claims, and at least in this instance that arrow hit its target.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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