Sara Lee Corp. v. Carter

• Decision Date: 08 October 1999
• Docket Number: No. 271PA98.,271PA98.
• Court: North Carolina Supreme Court
• Parties: SARA LEE CORPORATION v. Stephen Dowell CARTER.

519 S.E.2d 308

351 N.C. 27

SARA LEE CORPORATION v. Stephen Dowell CARTER.

No. 271PA98.

Supreme Court of North Carolina.

October 8, 1999.

Kilpatrick Stockton LLP, by Daniel R. Taylor, Jr., and Louis W. Doherty, Winston-Salem, for plaintiff-appellant.

Elliot, Pishko, Gelbin & Morgan, P.A., by David C. Pishko, Winston-Salem, for defendant-appellee.

ORR, Justice.

This action arises out of a suit brought by Sara Lee Corporation ("Sara Lee"), alleging, inter alia, that defendant, plaintiff's former employee, committed fraud, breach of fiduciary duty, and unfair and deceptive practices. The trial court ruled in plaintiff's favor and awarded Sara Lee $322,729.20 in damages for defendant's self-dealing and fraudulent conduct; $170,036.30 for salary and benefits that defendant received during his employment with Sara Lee; treble damages on both of these amounts pursuant to N.C.G.S. § 75-16; prejudgment interest; and Sara Lee's attorneys' fees and costs.

The record reflects the following events out of which this case arises.

Defendant worked as a "Service Manager" at ComputerLand in Winston-Salem, where he visited and serviced certain ComputerLand customers, including Sara Lee. In 1988, Mr. Gene Cain, defendant's contact at Sara Lee, approached defendant about servicing Sara Lee in an individual capacity. At that time, defendant was still employed by ComputerLand and, thus, initially declined this offer. However, at some point thereafter, defendant did perform the requested service work for Sara Lee.

On 2 January 1989, Sara Lee hired defendant to work as an "Information Center Service Administrator" in the Sara Lee Knit Products Division. When defendant began working at Sara Lee, he signed a form indicating that he had received a copy of Sara Lee's code of conduct and that he would comply with the policies contained therein. Specifically, Sara Lee's code of conduct contained a provision prohibiting an employee from engaging in undisclosed self-dealing with another entity that supplied products or services to Sara Lee.

At Sara Lee, defendant was responsible for the maintenance and repair of personal computers. Defendant's job description specifically provided that he would "develop[] and maintain[] relationships with vendors to provide [Sara Lee Knit Products] with the best possible pricing, availability, and support of hardware and services." Defendant was authorized and entrusted to order and purchase computer parts at the lowest possible prices.

During his employment with Sara Lee, but unknown to his employer, defendant developed four separate businesses (referred to by the trial court as "the Carter Enterprises" and consisting of C Square Consulting, Computer Care, Micro Computer Services, and PC Technologies) through which he engaged in self-dealing by supplying Sara Lee with computer parts and services at allegedly excessive cost while concealing his interest in these businesses. Sara Lee paid a total of $495,431.54 to defendant's businesses for parts and services.

Separate from and unrelated to defendant's self-dealing enterprises, defendant suffered a closed head injury when he fell at work on 8 July 1992. He subsequently filed a workers' compensation claim with the Industrial Commission. On 25 September 1992, Sara Lee terminated defendant's employment after investigating his self-dealing transactions. On 13 January 1993, the North Carolina Industrial Commission approved a Form 21 agreement for compensation for disability entered into by plaintiff Sara Lee and defendant. Pursuant to the Form 21 agreement, the parties stipulated that defendant sustained a closed head injury that arose out of and in the course of his employment and was, thus, disabled. Sara Lee agreed to pay temporary total disability benefits to defendant. The Industrial Commission conducted an evidentiary hearing on 20-21 May 1996 wherein Sara Lee asserted, in part, that the Commission should set aside the Form 21 award because of defendant's alleged misrepresentation or fraud. Sara Lee also submitted that it was "entitled to a credit for any benefits paid and to be paid against any amount [defendant] is determined to owe [Sara Lee] in any criminal or civil proceeding." As of the date of the original appeal of this case before the Court of Appeals, the Industrial Commission had not issued a ruling regarding defendant's receipt of workers' compensation benefits.

After discovering defendant's fraudulent acts, plaintiff Sara Lee filed this action against defendant on 14 February 1995 in Superior Court, Forsyth County, alleging breach of fiduciary duty, fraud, constructive fraud, conversion, and unfair and deceptive practices. Plaintiff sought both compensatory and punitive damages, treble damages under N.C.G.S. § 75-1.1, the imposition of a constructive trust, and attorneys' fees.

After the presentation of extensive evidence, the trial court made findings that "[t]he transactions between Sara Lee and the Carter Enterprises were not open, fair and honest. In fact, the clear, cogent, and convincing evidence is, to the contrary, that [defendant] used his position of trust at Sara Lee to make profits on transactions involving the Carter Enterprises without disclosing his financial interest in the Carter Enterprises to his superiors at Sara Lee."

The Court of Appeals affirmed the trial court's conclusion that "[d]efendant breached his fiduciary duty by selling computer parts to Sara Lee without disclosing his interest in the companies supplying these parts." Sara Lee Corp. v. Carter, 129 N.C.App. 464, 471, 500 S.E.2d 732, 737 (1998). In addition, the trial court found that "[t]he representations made by [defendant] were false, intentional, made with the intent that they be relied upon by Sara Lee, were in fact relied upon by Sara Lee and resulted in damage and injury being sustained by Sara Lee." Thus, the trial court determined that Sara Lee sustained damages in the amount of $322,729.20 as a result of defendant's fraudulent acts.

In its judgment, the trial court concluded that defendant "engaged in actual fraud and unfair and deceptive trade practices prior to, and actual fraud, constructive fraud, breach of fiduciary duty and unfair and deceptive trade practices throughout, the time that he was employed by ... Sara Lee Corporation from January 2, 1989 until September 25, 1992." In addition, the trial court concluded that defendant owed a fiduciary duty to Sara Lee with respect to his role in recommending the purchase and ordering of computer parts and related services for Sara Lee and that defendant breached that fiduciary duty and engaged in constructive fraud throughout the time that he was employed by Sara Lee. The trial court ordered that a constructive trust for the benefit of Sara Lee be imposed over any workers' compensation benefits that defendant receives or has received for the closed head injury.

The Court of Appeals affirmed the trial court's determination that defendant had breached his duty to plaintiff and had engaged in fraud against plaintiff, but held that defendant's conduct did not fall within the scope of unfair and deceptive acts or practices under chapter 75 of the North Carolina General Statutes (chapter 75) because defendant was an employee at the time he defrauded Sara Lee. In its reasoning, the Court of Appeals relied on the proposition articulated in Buie v. Daniel Int'l Corp., 56 N.C.App. 445, 289 S.E.2d 118,disc. rev. denied, 305 N.C. 759, 292 S.E.2d 574 (1982), that "employer-employee relationships do not fall within the intended scope of G.S. 75-1.1." Id. at 448, 289 S.E.2d at 119-20. Thus, the Court of Appeals vacated the trial court's award of treble damages and attorneys' fees which were granted pursuant to chapter 75. Moreover, the Court of Appeals ruled that the provisions of N.C.G.S. § 97-21, which provide in part that workers' compensation benefits are "exempt from all claims of creditors," precluded the imposition of a constructive trust on defendant's workers' compensation benefits. N.C.G.S. § 97-21 (Supp.1998).

In this appeal, plaintiff contends (1) that the Court of Appeals erred in not applying N.C.G.S. § 75-1.1 to defendant's conduct in this case even though an "employee" may have participated in the transactions, and (2) that the Court of Appeals misinterpreted the provisions of N.C.G.S. § 97-21 in holding that a constructive trust may not be imposed on workers' compensation benefits. We shall address each of these arguments in turn.

Although the Court of Appeals' opinion addressed only the question of whether an employer-employee relationship removes the case from the scope of N.C.G.S. § 75-1.1, defendant's assignment of error to the Court of Appeals challenges the trial court's conclusion of law that N.C.G.S. § 75-1.1 applied to the defendant's acts at issue. Therefore, it is necessary for us to determine if defendant's fraudulent acts and his breach of fiduciary duty constitute unfair and deceptive acts or practices under N.C.G.S. § 75-1.1 (the Act), which provides, in pertinent part: "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are declared unlawful." N.C.G.S. § 75-1.1(a) (1994). In analyzing an allegedly unfair and deceptive act or practice under the Act, we must first determine whether the act or practice falls within the purview of section 75-1.1 as the legislature intended. Because defendant does not dispute the trial court's finding that his actions were fraudulent, defendant's acts were conclusively "unfair or deceptive." See Hardy v. Toler, 288 N.C. 303, 309, 218 S.E.2d 342, 346 (1975)

. Thus, in the present case, we must next decide whether the activities and transactions between defendant and Sara Lee giving rise to this cause of action were "in or affecting commerce." See Johnson v. Phoenix Mut. Life Ins. Co., 300 N.C. 247, 266 S.E.2d 610 (1980).

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