Thomas H. Segars

Sometimes small errors can have big consequences. According to a recent Fourth Circuit decision, big consequences do not turn small errors into unfair or deceptive trade practices.

Edwards v. Genex Cooperative, Inc. considered a section 75-1.1 claim based on a breach of contract accompanied by “substantial aggravating factors.”

Parties to a broken contract often feel substantially aggravated, so these types of claims tend to “piggyback” onto mere contract cases. To curb that tendency, courts regularly provide guidance on what does or does not constitute a “substantial aggravating factor,” as we have discussed here, here, here, and here. To this body of case law, Edwards adds this proposition:

“A successful UDTPA claim requires aggravating or egregious circumstances accompanying a breach of contract. It is not enough to allege aggravating or egregious results of a breach.”

Edwards’s Beef

Edwards is a dispute about high-tech cattle breeding. Edwards Land & Cattle matches “genetically elite semen from prize bulls” with “genetically elite embryos from prize cows” to produce “super elite” offspring. (You may recognize this line of business from one of the leading cases on the extraterritorial application of section 75-1.1, Lloyd v. Carnation Co.) This operation depends on liquid nitrogen to keep these valuable “biologic products” frozen and preserved in steel tanks.

For over 15 years, Genex Cooperative supplied Edwards with liquid nitrogen without major incident. Genex initially filled seven tanks on Edwards’s farm with liquid nitrogen. Because nitrogen vaporizes over time, Genex also came by periodically to refill the tanks. This was done pursuant to a contract.

One fateful day in October 2015, however, Edwards discovered that four of the seven tanks were completely empty of liquid nitrogen and that the other three were extremely low. Edwards desperately tried to reach Genex for help, but the sales manager would not return the calls. Edwards found another supplier to quickly refill the tanks, but “despite the quick refill of liquid nitrogen, four of the seven tanks suffered losses of semen and embryos.”

Edwards wanted to know why the liquid nitrogen levels became depleted and why the problem was not discovered sooner. The case discusses at some length the various standards and methods used to monitor nitrogen levels in these types of tanks. It suffices to say that the parties disagree about the cause and about who was responsible. The following facts, however, were undisputed:

• A “hang tag” for each tank indicated that Genex had last filled the tanks in July 2015.
• In late September 2015, Genex sent a letter to Edwards explaining that, effective immediately, Genex would no longer provide liquid nitrogen.
• The letter represented that the tanks had been filled on August 31, 2015, and enclosed invoices for that work.
• Importantly, though, no August 2015 delivery had ever been made.
• Genex’s sales manager had been instructed not to contact Edwards after the September 2015 termination letter, which explains why he did not return the calls.

So, Edwards had a beef with Genex. Edwards believed that Genex was contractually liable for the losses that it sustained. Moreover, Edwards considered the circumstances surrounding Genex’s contract termination—in particular, the representations about, and invoicing for, a liquid-nitrogen delivery that never occurred and the failure to return phone calls—to be “immoral, unethical, and misleading.”

Calling Bull on a Section 75-1.1 Claim

Edwards sued Genex to recover for the losses. Initially, Edwards brought only a breach-of-contract claim. After learning the facts described above, however, Edwards twice sought leave to amend its complaint to add a section 75-1.1 claim.

On both occasions, the district court denied Edwards’s motion, reasoning that the amendment would be futile. Edwards’s proposed amendment would not state a claim. The Fourth Circuit affirmed.

Significantly, Edwards “did not allege that Genex intentionally lied about the final fill date of the tanks.” Rather, the termination letter and invoices for an August 2015 filling that never happened “were the product of an unfortunate clerical error.”

The Edwards court concluded that this unfortunate clerical error “simply [did] not amount to the egregious or aggravating circumstances attending a breach of contract necessary to transform an ordinary breach of contract claim into a UDTPA claim.”

Edwards argued that the “disproportionate consequences of this error”—that is, the loss of highly valued biologic products—weighed in favor of letting its section 75-1.1 claim proceed.

The court rejected this argument. As noted above, the court made clear that the aggravating or egregious circumstances must accompany the breach. It is not enough for the results to be aggravating or egregious. “If that were the case,” the court reasoned, “then any contract dispute that results in serious losses could present a valid UDTPA claim.”

(You may wonder why Edwards did not argue that the termination letter and invoices gave rise to a misrepresentation-based section 75-1.1 claim. The factual background is replete with evidence that checking the liquid-nitrogen levels was Edwards’s responsibility and that Edwards did not do this regularly. These facts suggest that Edwards would have been hard-pressed to allege, much less prove, that it actually and reasonably relied on Genex’s representations. These would be necessary elements of a misrepresentation-based claim under Bumpers v. Community Bank of Northern Virginia.)

Author: Tom Segars