Bar News - April 15, 2015
Consumer Protection Applied to Abusive Litigation Tactics
By: Paul J. Bauer and Christopher D. Hawkins
The United States District Court for the District of New Hampshire recently issued a decision in Gallagher v. Funeral Source One Supply and Equipment Co. Inc. (Feb. 24, 2015) that could expand the scope of conduct subject to the New Hampshire Consumer Protection Act (CPA).
|Paul J. Bauer
|Christopher D. Hawkins
The court found that the CPA may apply to settlement discussions between corporate entities represented by attorneys, concluding “CPA liability can extend to abusive litigation practices, and I decline to hold otherwise in the absence of clear direction from the New Hampshire Supreme Court,” writes US District Court Judge Paul Barbadoro.
According to GT Crystal Sys. LLC v. Khattak, (2012) (McNamara, J.), “The purpose of the CPA is to ensure an equitable relationship between consumers and persons engaged in business.” The language of the statute states that “[i]t shall be unlawful for any person to use any unfair method of competition or any unfair or deceptive act or practice in the conduct of any trade or commerce within this state.” A private right of action is granted to “[a]ny person injured by another’s use of any method, act or practice declared unlawful under this chapter…,” and the term “person” is defined to include “natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, and any other legal entity.” Therefore, a private CPA claim can be asserted by a corporate entity.
To properly support a CPA claim, a plaintiff must demonstrate that the defendant’s conduct fell into one or more enumerated categories of prohibited conduct, and that conduct achieved “a level of rascality that would raise an eyebrow of someone inured to the rough and tumble world of commerce,” as held in Barrows v. Boles (NH 1996).
The Gallagher decision is noteworthy because it represents an expansion of the CPA in New Hampshire. Although New Hampshire courts have traditionally viewed the CPA as a means of ensuring equity as between consumers and businesses, Gallagher permits use of the CPA to challenge litigation tactics employed by a competing business. As such, the court appears to be viewing litigation tactics as “act[s] or practice[s] in the conduct of any trade or commerce within this state.”
The District Court reaches its conclusion based primarily on a review of existing New Hampshire, Massachusetts, and First Circuit case law. That case law, however, does not offer definitive support for the District Court’s decision.
In NH Ball Bearings, Inc. v. Jackson (NH Super. Ct. Nov. 20, 2006), the plaintiff alleged that a former employee copied closely guarded confidential documents and provided them to his new employer, a competitor. The employee brought a counterclaim under the CPA, alleging that plaintiff initiated a frivolous lawsuit in an attempt to chill competition. In determining that this counterclaim should survive a motion to dismiss, the court simply stated:
“While the Consumer Protection Act does not specify that the initiation of a lawsuit is an unfair method of competition, initiating a frivolous lawsuit to prevent a former employee from sharing public domain information with his new employer and to chill competition raises the court’s eyebrow. In this context, this is sufficient to support a conclusion that the allegations if proved would raise the eyebrow of someone inured to the rough and tumble of the world of commerce.
The issue was addressed again in GT Crystal Sys. LLC v. Khattak (NH Super. Ct. Jan. 30, 2012), with different results. Here, a defendant again filed a counterclaim under the CPA alleging that the plaintiff filed its lawsuit in bad faith to chill competition.
Judge Richard McNamara found that “the purpose of the CPA is to ensure the equitable relationship between consumers and persons engaged in business... [and] [f]iling a lawsuit, as here, is not the type of transaction the CPA aims to protect.”
Ultimately, the court recognized that the defendant’s counterclaim “is better characterized as a malicious prosecution claim... [which is] considered to be premature until an action terminates in a parties’ favor.”
The New Hampshire Supreme Court has not spoken decisively on this issue, only stating in Axenics Inc. v. Turner Constr. Co. (2013), “[a]ssuming, without deciding, that unfair litigation tactics fall within the scope of the CPA, [plaintiff] has failed to demonstrate that the defendants’ litigation tactics in this case were so egregious as to satisfy the rascality test.”
Massachusetts case law is more supportive of the District Court’s findings. In Schubach v. Household Finance Corp. (Mass. 1978), plaintiffs brought a CPA claim against a financing corporation, alleging that it was purposefully precipitating default judgments by filing collection actions in locations inconvenient for debtors. In allowing the suit to proceed, the court noted that although the practice was permitted by state law, it could still be adjudged unfair under the CPA. Specifically, the court held “[t]he fact that particular conduct is permitted by statute or by common law principles should be considered, but it is not conclusive on the question of unfairness.”
A later Massachusetts case, Datacomm Interface Inc. v. Computerworld Inc. (Mass. 1986) involved a lawsuit filed against an entity for attempting to hold a trade show under a name already used by the plaintiff. The defendant brought a counterclaim alleging that the plaintiff violated the CPA by wrongfully withholding documents during discovery, and misstating facts in its complaint. The court simply stated, without substantive analysis, “[i]t is clear that the type of misconduct found by the master falls within the concept of ‘unfair acts’ prohibited by [the CPA].”
Finally, the First Circuit’s opinion in Refuse & Environmental Systems Inc. v. Industrial Services of America Inc. (1991), addresses a dispute between waste management firms. The plaintiff’s former employees started their own competing company, and plaintiff brought suit against that competitor alleging that they had stolen clients from their previous employer. The defendant brought a CPA counterclaim against the plaintiff, arguing that the initial lawsuit was frivolous. Ultimately, the court found that the plaintiff, “in bringing the state lawsuit in spite of the evidence, willfully committed an unfair and deceptive practice within the meaning of [the CPA].”
There are at least two pragmatic implications worth noting here. First, the CPA, which is already included as a matter of course in nearly every complaint filed against a business entity, continues to expand.
Businesses may now be subject to CPA claims whenever they engage in particularly aggressive discovery, dare to pursue a claim that ultimately is not supported by the evidence, or take a hard line stance in settlement discussions. While such actions would not intuitively be considered “act[s] or practice[s] in the conduct of any trade or commerce,” they can now be included under the reach of the CPA.
Second, and of particular importance to New Hampshire attorneys, actions taken by counsel can apparently subject a business to CPA liability. It would not be a stretch to imagine a litigant who is subjected to a CPA claim based on a settlement letter drafted by counsel to subsequently bring a malpractice claim against that counsel should the CPA claim prove successful.
The Gallagher case raises important questions regarding the interplay between the CPA, the torts of malicious prosecution, malicious defense, and abuse of process, Rule 11(d) of the Superior Court Civil Rules, the court’s inherent authority to sanction misconduct, and the litigation privilege. For the time being, attorneys must proceed cautiously when employing “aggressive” litigation tactics, lest they subject their clients and themselves to potential liability for violating the CPA.