CBD Industry Dispute Examines when Conduct Outside an Entity can be Considered an Internal Dispute that Avoids Gateway to Unfair Trade Practice Damages
The CBD product market, by some estimates, could skyrocket to $19.5 billion by 2025. With farmers, manufacturers and distributors scrambling for a seat at this lucrative table, it’s not surprising to see the Business Court joining the fray to referee the exchange of sharp elbows among industry hopefuls. In Botanisol Holdings II, LLC v. Propheter, 2021 NCBC 68, the ownership of a CBD processing business left childhood friends at odds and money flowing in ways at least one of them didn’t intend.
David Talenfeld and Scott Propheter, along with Propheter’s father-in-law, David Mayer, shared roughly equal control of an Arizona LLC that was set to enter a joint venture with Thar Process Technologies. Thar would provide equipment for a CBD processing plant, and Criticality, LLC (an Arizona company) would supply the hemp and run the facility. Id. ¶¶ 4, 7, 9. The lurking plot twist is that Propheter also privately formed a North Carolina entity, Criticality, LLC, without apparent notice to Talenfeld. Id. ¶ 14,
Corporate hijinks ensued. Talenfeld would later learn that the joint venture was not owned 50/50 between Thar and Criticality Arizona. Propheter had another entity he controlled own a portion of the venture. And Criticality North Carolina allegedly sold 40% of its interest for $10,000,000 to one buyer, and 60% of its equity to a second for an undisclosed price. Id. ¶¶ 17, 20, 23. A lengthy litigation lies ahead, likely centered around the fraudulent misrepresentation and fraud claims that Judge Earp forwarded past Rule 12 practice.
Unfair and Deceptive Trade Practices
But, as the action proceeds, the story of the two Criticality entities, and whether the North Carolina iteration was used in the place of its Arizona relative to improperly advantage Propheter at the expense of the joint venture parties, will not include the risk of treble damages under Chapter 75. The Court dismissed the unfair and deceptive trade practices claim against the defendants as not meeting the “in or affecting commerce” test of Chapter 75 because the Act does not cover “[m]atters of internal corporate management.” Id. ¶¶ 62-63. See Wilson v. Blue Ridge Elec. Membership Corp., 578 S.E.2d 692, 694 (N.C. App. 2003). The Court reasoned that the North Carolina iteration of Criticality was alleged as being “an instrument” used by Propheter “to facilitate harm within” the Arizona entity, and therefore “the dispute is intracorporate” and not covered by Chapter 75. 2021 NCBC 68, ¶ 64.
As recently as 2019, the Business Court reiterated its stance that Chapter 75 claims which purport to center on shareholder disputes, disagreements among company members, and other issues of internal management or strife are misplaced. We wrote about it here, noting the Court’s waning patience with over-used Chapter 75 allegations. “By now,” the Court noted in Constr. Managers, Inc. v. Amory, 2019 NCBC 31, “the message should be clear: section 75-1.1 plays no role in resolving these internal corporate disputes.” Botanisol Holdings revisits a tangent of the settled rule: that external conduct can be properly viewed as an intracorporate affair when directed to cause harm in the entity.
The Court relies on the North Carolina Supreme Court’s ruling in White v. Thompson, 691 S.E.2d 676, 680 (N.C. 2010) that
“the Act was designed to achieve fairness in dealings between individual market participants” . . . [and] “is not focused on the internal conduct of individuals within a single market participant, that is, within a single business.”
In White, the Supreme Court explained that a partner which diverted business opportunities to another entity he controlled and misinformed his partners about the subterfuge “unfairly and deceptively interacted only with his partners, [and] his conduct occurred completely within the [ ] partnership and entirely outside the purview of the Act.” Id.
Interestingly, White itself relies on Sara Lee Corp. v. Carter, 519 S.E.2d 308 (1999), where Chapter 75 was found to apply when a corporate employee arranged for his company to buy parts from a firm in which he had a financial interest. The Supreme Court found those actions occurred outside the employee’s relationship with the employer and were more properly viewed as interactions between the employer and the employee-related entity. Id. at 312.
Botanisol Holdings fairly relies on White to conclude that Propheter acted “completely within [Criticality Arizona],” 691 S.E.2d at 680, when he allegedly used and concealed two entities outside that company to construct a labyrinth of business relationships that may have enriched himself and other entities at the expense of the Arizona entity and his childhood pal, Talenfeld. Perhaps, though, the North Carolina Supreme Court will have occasion to find a middle ground between cases that conflate evidently internal disputes into treble-damage claims, and actions like Botanisol Holdings that consider elaborate external schemes as matters of “internal corporate management.”
- Current North Carolina law provides defendants an effective tool to recharacterize conduct occurring outside a corporate entity to nonetheless be considered a dispute involving “internal corporate management” that avoids potential Chapter 75 liability.
- If you made it this far, perhaps take a final step and review the inspiration for the headline – “The Trouble with Tribbles,” episode 15 of Star Trek season 2 from December 1967.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.