If you represent a plaintiff in a claim for unfair trade practices, you want the court to get to the heart of your claim. You’ve got a fact pattern, after all, that shows that someone was mistreated. 

The story’s different for defense counsel. You might have a winning argument on the merits—what sounds unfair is actually totally fair—but your first line of defense often centers on procedural arguments. 

These competing approaches frame the subject of this post, a recent decision from a federal court in Virginia called Lambert v. Navy Federal Credit Union.  

Lambert features a classic fact pattern for this type of litigation: fees by a financial institution that seem unfair at a general level. 

The Lambert defendant had a response on the merits. But it also had two potent procedural issues at the threshold. 

The first issue was preemption. A federal statute governs the conduct of federal credit unions. The defendant credit union argued that the statute preempted the plaintiff’s claims. 

The second issue was choice-of-law. The plaintiff lived in North Carolina, but her contract with the credit union had a Virginia choice-of-law provision. Did the clause bar her claim for violation of N.C. Gen. Stat. § 75-1.1?  

Not a More Perfect Union

The Lambert plaintiff alleged that her credit union charged her too many fees when her insurance company tried to deduct her insurance premium from her account at the credit union. The credit union rejected the first try because of insufficient funds; the credit union charged a fee for the rejection. The insurance company tried again two days later. The credit union again rejected the request for insufficient funds and, again, charged the same fee. 

The Lambert plaintiff characterized the two fees as unfair given that, in essence, there was really just a single effort to debit her account. She sued the credit union for breach of contract and violation of section 75-1.1. 

The credit union moved to dismiss. It argued that the Federal Credit Union Act preempted the plaintiff’s state-law claims. It also argued that, under the choice-of-law provision in its contract with the plaintiff, Virginia law governed the claim—and Virginia law doesn’t permit a claim against credit unions for unfair trade practices. 

Not Fundamentally Unfair, but Fundamentally Preempted 

The preemption argument had teeth.  

Under the statute’s implementing regulations, a federal credit union can determine the types of fees that affect accounts. The same regulations say that state laws that regulate “such activities” don’t apply to federal credit unions. 

This regulation didn’t wholly foreclose the plaintiff’s claims, but it drew an important line. To the extent the claim challenged the fairness of the fee practice, the claim was preempted. But the regulation didn’t preempt a claim for true breach of contract or for affirmative misrepresentation. A line of federal decisions conclude that Congress didn’t intend to preempt these bread-and-butter state-law claims. The Lambert court followed these decisions. 

The Lambert court then concluded that, based on the language in the contract that governed the account, the credit union had the right to charge the multiple fees that it charged. I won’t get into that here, because the analysis doesn’t involve North Carolina law. 

But one contract issue did involve North Carolina law: whether the contract’s choice-of-law provision—which calls for the application of Virginia law—barred the plaintiff’s claim for violation of section 75-1.1. 

The Lambert court concluded that it did. The clause was broad, announcing that the account was “maintained and governed in accordance with federal laws and the laws of the Commonwealth of Virginia.” The plaintiff’s claim fell in the heart of the clause. It concerned how the credit union maintained the account. 

The court engaged in this analysis because the laws of Virginia and North Carolina law diverge on unfair trade practices as applied to credit unions. Section 75-1.1 permits claims against credit unions. Virginia’s analogue statute does not.  

The court therefore asked: Would applying Virginia law violate fundamental North Carolina public policy? No, the court concluded. The court emphasized that section 75-1.1 lacks any language suggesting that the General Assembly intended the statute to embody fundamental public policy.  

The court also cited Canon U.S.A. v. Cavin’s Business Solutions, a case decided a few years ago by a federal court in New York that reached the same conclusion on similar facts. The Canon court reasoned that the fact that one state’s law is narrower than North Carolina laws does not mean that the former state’s interest is somehow less important than North Carolina’s interests. Put another way, the fact that North Carolina law has a more expansive little FTC Act does not mean that the substance of the act is a fundamental public policy.  

Interestingly, if this issue had been before a court in North Carolina, the choice-of-law clause wouldn’t have played a controlling role. Though unsettled, North Carolina’s choice-of-law regime for claims for unfair trade practices invokes either the lex loci test or the “most significant relationship” test. 

Be Sure to Credit the Potency of Procedural Arguments 

The preemption and choice-of-law issues in Lambert are each individually interesting.  

But the big-picture takeaway here is that a claim for unfair trade practices can often face a barrage of non-merits arguments in a Rule 12(b) motion. This is especially true if the claim concerns conduct that’s subject to extensive regulation or federal regulation, or if the claim concerns multistate conduct. 

Whether any particular claim can sidestep these types of issues is case-dependent. But identifying these issues at the outset, regardless of which party you represent, is important. If you represent the plaintiff, seeing and assessing these issues plays a big role in evaluating whether to pursue the case—and certainly to set client expectations. And if you represent the defendant, these issues can be powerful tactical plays if you’re trying to avoid an examination of whether your client’s conduct could be characterized as unfair. 

Author: Stephen Feldman