If so, you’re in luck. A new comment in the North Carolina Law Review serves up a main course on the issue.
The article is called Bank Sales and Bake Sales: Section 75-1.1 and the HAJMM Legacy, and it is written by third-year law student Robert T. Lucas IV.
Lucas focuses on section 75-1.1’s “potential as a remedial backstop when regulatory schemes do not apply.” He describes a “gap” in the law “when allegedly unfair or deceptive conduct arises out of a transaction related to a regulatory scheme but the conduct itself is not actually subject to the scheme’s regulation.”
This sounds like the Contant court’s reason for rejecting the “regulatory scheme exception” argued in that case. Contant permitted a section 75-1.1 claim to proceed, distinguishing the defendants’ pervasively regulated conduct cases because “in each of [those cases], the plaintiff could bring a cause of action and seek relief under a different statute.”
Is this reasoning persuasive?
Setting the Table
Lucas begins where the relevant cases take root: the “in or affecting commerce” requirement in section 75-1.1(a). This requirement, as Lucas explains, developed over time.
Originally, the statute prohibited practices “in the conduct of any trade or commerce.” Courts interpreted this narrowly. In State ex rel. Edmisten v. J.C. Penney Co., the North Carolina Supreme Court held that the statute covered only “bargain, sale, barter, exchange or traffic” in goods.
The General Assembly intended Section 75-1.1 to apply more expansively. Its response to J.C. Penney was swift. In 1977, it deleted the (arguably limiting) word “trade” and clarified that the statute covered “all business activities, however denominated.” The language is in section 75-1.1(b).
The General Assembly did not, however, define “business activities.” As Lucas illustrates, this omission would become significant.
After these amendments, a series of cases concluded that the General Assembly did not intend the statute to apply to pervasively regulated conduct. These cases—Lindner v. Durham Hosiery Mills, Inc., Skinner v. E.F. Hutton & Co., and HAJMM Co. v. House of Raeford Farms, Inc.—expounded the idea that pervasively regulated conduct falls outside the scope of conduct “in or affecting commerce.”
Lucas closely examines the reasoning in these cases. He also examines Champion Pro Consulting Group, Inc. v. Impact Sports Football, LLC, as an extension of this reasoning to “private codes of conduct.”
Lucas’s comment focuses especially on HAJMM. That case had some particularly unique features when compared with Lindner and Skinner, which involved traditional securities. The courts in those cases emphasized that securities regulations unquestionably provided recourse for the allegedly wrongful conduct.
HAJMM, by contrast, involved unconventional “revolving fund certificates.” Misconduct in transactions involving “revolving fund certificates” was not explicitly regulated.
Nevertheless, HAJMM reasoned that the conduct fell outside of the statute’s scope. Although this is the same ending point reached in Lindner and Skinner, the HAJMM court had to take a new route to get there.
HAJMM could not base its holding on the existence of a regulatory remedy; it was not clear that one existed. (This facet of HAJMM is in obvious tension with the reasoning in Contant.)
Instead, HAJMM turned to the meaning of the term “business activities” from the 1977 amendment. Although the General Assembly acted in response to J.C. Penney and in an effort to expand the statute’s scope, HAJMM read this term narrowly.
“Business activities,” according to HAJMM, meant “regular, day-to-day activities, or affairs, such as the purchase and sale of goods, or whatever other activities the business regularly engages in and for which it is organized.” The court reasoned that issuing securities and other efforts to raise capital were “extraordinary event[s]” that fell outside of the definition.
The novelty of this reasoning was not lost on Justice Harry C. Martin, who dissented from this part of HAJMM. Justice Martin disagreed with the conclusion that efforts to raise capital were not “business activities.” He also noted that the majority’s decision marked a departure from the reasoning in Lindner and Skinner, where the regulation already provided a remedy for the specific conduct at issue.
According to Lucas, this dissent foreshadowed the gap in the law that developed.
A HAJMM Sandwich
Lucas describes how certain section 75-1.1 plaintiffs may get sandwiched between two unfavorable legal principles. (In fairness to Lucas, he more aptly calls it “the HAJMM conundrum.”)
On one side, if the conduct at issue stems from an “extraordinary event” outside of HAJMM‘s definition of “business activities,” then section 75-1.1 will not apply. This will be true whether or not the conduct is subject to pervasive regulation.
On the other side, if the general subject matter is subject to pervasive regulation, then the plaintiff may be limited to the remedy provided by that regulation. If there is no such remedy addressing the specific conduct, as was the case in HAJMM, then the plaintiff may be out of luck.
(Some other law may still provide a remedy. After all, the HAJMM plaintiffs themselves recovered compensatory and punitive damages at trial on claims for breaches of fiduciary duties and corporate bylaws.)
Since HAJMM, several courts have discussed this dilemma. Some have even identified it as an area of concern. In this regard, Lucas carefully examines Oberlin Capital, L.P. v. Slavin, Latigo Investments II, LLC v. Waddell & Reed Financial, Inc., DeGorter v. Capitol Bancorp Ltd., and Tillery Environmental LLC v. A&D Holdings, Inc.
The Future of the HAJMM Sandwich
Lucas ends with legislative and judicial proposals for closing the gap created by HAJMM’s reasoning. These policy arguments are thought-provoking.
Practitioners and legislators will debate the wisdom and the effect of HAJMM’s reasoning. Regardless of the side you take in this debate, though, you will find Lucas’s comment to provide a succinct summary of the law, a useful collection of relevant cases, and a thoughtful analysis of each side’s reasoning.