Surgeon v. TKO Shelby, LLC

Opinions

Opinion

IN THE SUPREME COURT OF NORTH CAROLINA

No. 198A22

Filed 22 March 2024

GARY W. SURGEON and MARLA LEPLEY-STARR, individually and on behalf of those similarity situated

v.

TKO SHELBY, LLC, trading as NISSAN OF SHELBY; INTEGRITY AUTOMOTIVE PROMOTIONS, LLC; A TO Z STAFFED EVENTS, INC.; BRIAN LEACHMAN; MICHAEL SMITH; and TRAVIS K. OSTROM, d/b/a THE TKO GROUP, defendants; DEALER COMPLIANCE SERVICES, INC., cross-claim defendant

Appeal pursuant to N.C.G.S. § 7A-27(a)(4) from an order granting plaintiff’s

motion for class certification entered on 13 December 2021 by Judge Forrest D.

Bridges, in Superior Court, Gaston County. Heard in the Supreme Court on 12

September 2023.

Higgins Benjamin, PLLC, by John F. Bloss and Frederick L. Berry, for plaintiff-appellees.

Gray, Layton, Kersh, Solomon, Furr & Smith, P.A., by Michael L. Carpenter and D. Scott Hester, Jr.; Wilson Elser Moskowitz Edelman & Dicker LLP, by Jeremy A. Stephenson; and Barnes, Alford, Stork & Johnson, LLP, by Curtis W. Dowling and Matthew G. Gerrald, for defendant-appellants.

DIETZ, Justice.

Plaintiffs brought this class action lawsuit after receiving a promotional flyer

from a car dealership. They allege that the flyer was deceptive and misled them into

believing they won a free car or $20,000 cash. Instead, they received a $2 prize.

Opinion of the Court

Plaintiffs allege that they and nearly one thousand other people were harmed by the

deceptive promotion.

The trial court certified plaintiffs’ case as a class action in a detailed written

order, and defendants appealed. At oral argument, the parties acknowledged that the

trial court’s certification order is internally inconsistent. Specifically, the trial court’s

order used one class definition to analyze the certification criteria, then changed the

definition when actually certifying the class.

This inconsistency requires us to vacate the order and remand for further

proceedings. As explained below, we cannot engage in meaningful appellate review

of a trial court order—particularly one that includes a discretionary component—

when the order suffers from this type of internal contradiction.

Because we vacate the order on this basis, we need not address all of

defendants’ arguments in this appeal, many of which may be mooted by entry of a

new order. We limit our analysis to a few issues, such as conflicts of interest and

efficiency concerns, that are likely to persist on remand even after the inconsistency

is corrected.

Facts and Procedural History

I. The promotional sales event

In 2018, plaintiffs Gary Surgeon and Marla Lepley-Starr received a

promotional flyer in the mail advertising a “Game On Tent Sale Event” held

exclusively at Nissan of Shelby, an automobile dealership. The flyer informed

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recipients that they had the chance to win one of six “grand prizes,” including the

largest prize, a 2018 Nissan Sentra SR or $20,000 in cash. In the middle of a grid

displaying these grand prizes, there was a scratch-off area that revealed a contest

code.

On the flyer, promotional language stated that recipients who “scratch and

match” their scratch-off codes with one of the numbers assigned to a prize become a

“guaranteed winner.” The flyer instructed recipients with a matching code number to

call the event hotline and come to the dealership during the sales event to claim their

prize.

Although not evident from the flyer itself, the code number beneath the

scratch-off portion of all 50,000 flyers was the same. It matched the code number

assigned to the largest grand prize, the 2018 Nissan Sentra SR or $20,000 in cash.

This scratch-off code was not the code number used to identify the winning

contestants of the contest. Instead, each flyer had a separate “activation code” located

in a red box under the contest instructions. This code, which was unique to each flyer,

was used to identify the contest winners.

After receiving the flyer, plaintiffs each scratched off the area labeled “scratch

and match” on their flyers and revealed the code number matching the 2018 Nissan

Sentra SR or $20,000 prize. Plaintiffs called the event hotline to claim their prize. An

automated answering system congratulated them on winning and prompted them to

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come to the dealership to claim their prize.1

As a result, both plaintiffs visited the dealership during the sales event. When

they tried to claim their prizes, plaintiffs learned that they were not winners of the

2018 Nissan Sentra or $20,000. Dealership agents told plaintiffs that the hidden

numbers beneath the scratch-off area of their contest flyers did not mean anything.

Instead, the agents explained, the “activation code” in the red box on the flyer

determined which prize each recipient had won. Those activation code numbers

matched numbers on a poster displayed at the dealership. In addition to the six

“grand prizes” on the contest flyer, there was a seventh prize box on the poster that

awarded a $2 cash prize. The sales agents at the dealership told plaintiffs that, based

on their activation codes, they won the $2 prize.

II. The class action lawsuit

Plaintiffs later brought a class action complaint against the dealership and

various other parties connected to the sales promotion. They sought to certify a class

of “all individuals who received a contest [f]lyer which had the scratch-off number

801602,” which was the number matching the 2018 Nissan Sentra SR or $20,000 cash

prize, and who then “went to Nissan of Shelby to claim their prizes.”

Plaintiffs alleged that defendants created a deceptive contest flyer in violation

of North Carolina law governing unfair or deceptive trade practices; breached the

1 As noted below, the complaint alleges that plaintiff Marla Lepley-Starr called the

event hotline, but the record indicates she may have called the dealership directly and spoken to a sales agent.

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terms of a contract with recipients of the flyer by failing to deliver the prizes; and

negligently created and implemented the sales event.

During discovery, defendants produced a log with contact information for

approximately 50,000 households that received the flyer in the mail. Defendants also

produced a log of the 2,557 people who called the event hotline to claim their prize.

That log lists 1,167 people as using the hotline to make an appointment to visit the

dealership.

Defendants did not produce any records identifying the people who actually

visited the dealership to claim a prize. There is a factual dispute concerning what

happened to those records and who is responsible. At this stage in the proceeding,

defendants estimate that 927 people visited the dealership during the sales event,

although not all of those people necessarily visited to claim a promotional prize.

III. The trial court’s class certification

Several years into the lawsuit, the trial court granted plaintiffs’ motion to

certify a class. Surgeon v. TKO Shelby, LLC, No. 18 CVS 3983, 2021 WL 9772618, at

*5 (N.C. Super. Dec. 13, 2021).

The trial court defined the class of plaintiffs in its written order as follows:

All individuals who received at their place of residence a contest Flyer promoting a contest held at Nissan of Shelby in late April and/or early May 2018, which had the scratch- off number 801602 that matched the number for Prize 5 (the 2018 Nissan Sentra SR or $20,000.00 cash), and who went to Nissan of Shelby to claim their prize.

Id. at *5.

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In its analysis in the order, the trial court explained that it intended to certify

a class of the “Ups.” Id. at *4. The trial court’s order defines the “Ups” as “the

approximately 927 people who called the number and who showed up at the

dealership.” Id. Notably, the definition of “Ups” used in the court’s analysis includes

a requirement that the class members both “called the number” and “showed up at

the dealership.” Id.

The class definition quoted above, by contrast, applies to anyone who received

the flyer and then “went to Nissan of Shelby to claim their prize” regardless of

whether they called the event hotline as the flyer instructed. Id. at *5.

Then, in the trial court’s instructions regarding notice to potential class

members, the court ruled that notice should be sent to the “1,167 people who called

the telephone number on the contest flyer and made an appointment to come to the

dealership for the sales event,” limiting notice to those people who called the event

hotline and made an appointment—a smaller subset of the 2,557 people who called

the hotline to claim a prize, and who may have gone to the dealership without making

an appointment. Id.

Defendants appealed the trial court’s class certification order directly to this

Court under N.C.G.S. § 7A-27(a)(4).

Analysis

This Court reviews a trial court’s class certification order for abuse of

discretion. Fisher v. Flue-Cured Tobacco Coop. Stabilization Corp., 369 N.C. 202, 209

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(2016). The “test for abuse of discretion is whether a decision is manifestly

unsupported by reason or so arbitrary that it could not have been the result of a

reasoned decision.” Frost v. Mazda Motor of America, Inc., 353 N.C. 188, 199 (2000)

(cleaned up). Within this analysis, we review the trial court’s conclusions of law,

including its evaluation of the legal criteria to establish a class, de novo. Fisher, 369

N.C. at 209.

I. Class certification criteria

We begin our analysis by reviewing the criteria for class certification. Rule 23

of the North Carolina Rules of Civil Procedure permits class actions when the

“persons constituting a class are so numerous as to make it impracticable to bring

them all before the court.” N.C.G.S. § 1A-1, Rule 23(a) (2023).

The party seeking class certification bears the burden to show that a proper

class exists, meaning “the named and unnamed members each have an interest in

either the same issue of law or of fact, and that issue predominates over issues

affecting only individual class members.” Crow v. Citicorp Acceptance Co., 319 N.C.

274, 280 (1987).

Beyond this threshold requirement, the party seeking class certification also

must satisfy a number of other certification criteria, including: (1) that the class

representatives have the ability to fairly and adequately represent the interest of all

class members; (2) that there are no conflicts of interest between the class

representatives and the unnamed class members; (3) that the class representatives

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have a genuine personal interest in the outcome of the suit; and (4) that the class

representatives have the ability to adequately represent class members outside of the

jurisdiction; (5) that the proposed class members are so numerous that it is

impractical to bring them all before the court; and (6) that it is possible to provide

sufficient notice to all putative class members. Id. at 282–83.

Once these legal prerequisites are met, the trial court may, in its discretion,

certify a class. Faulkenbury v. Teachers’ & State Emps.’ Ret. Sys. of N.C., 345 N.C.

683, 697 (1997). In evaluating whether class certification is appropriate, the trial

court should consider “whether a class action is superior to other available methods”

to adjudicate the controversy and whether the class action is “likely to serve useful

purposes such as preventing a multiplicity of suits or inconsistent results.” Crow, 319

N.C. at 284. The court also should balance the potential benefits of class certification

against “inefficiency or other drawbacks” to class certification. Id. This “inefficiency”

includes the possibility that the costs of administering a class action exceed the

plaintiffs’ potential recovery. Maffei v. Alert Cable TV of N.C., Inc., 316 N.C. 615, 620

(1986).

Defendants argue that the trial court’s class certification order fails to comply

with many aspects of this multi-step test. They first challenge several of the trial

court’s conclusions of law, arguing that the class members are not sufficiently

ascertainable; that there are irreconcilable conflicts of interest; and that any common

issues of law or fact do not predominate over the many other issues affecting

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individual class members.

Defendants also argue that the trial court abused its discretion by certifying

the class because the costs and drawbacks of this particular class far outweigh any

benefits to the putative class members. Before we address defendants’ arguments, we

first address a conflict in the wording and reasoning of the trial court’s order.

II. Conflicting class definitions

In its order, the trial court stated that the “Class consists of the approximately

927 people who called the number and who showed up at the dealership—the ‘Ups.’”

The court then explained that the plaintiffs “have the names of most class members”

because that information is contained in the list of 1,167 people who called the hotline

number and made an appointment to go to the dealership to claim their prize.

The trial court used this definition of “Ups”—people who both called the hotline

number and went to the dealership to claim a prize—to conduct its class certification

analysis, including its analysis of whether class members were sufficiently

ascertainable, whether there were conflicts of interest among members of the class,

and whether it was possible to provide sufficient notice to class members.

But then, when the trial court certified the class, it used a broader definition

that included any person who received the promotional flyer and went to the

dealership to claim a prize, regardless of whether that person first called the contest

hotline or made an appointment:

All individuals who received at their place of residence a contest Flyer promoting a contest held at Nissan of Shelby

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in late April and/or early May 2018, which had the scratch- off number 801602 that matched the number for Prize 5 (the 2018 Nissan Sentra SR or $20,000.00 cash), and who went to Nissan of Shelby to claim their prize.

This definition of the class does not match the one the court used in its certification

analysis.

The mismatch between the class the trial court analyzed and the one it

ultimately certified requires us to vacate the order and remand the matter for further

proceedings. We cannot engage in meaningful appellate review of a trial court order—

particularly one that includes a discretionary component—when the court’s ultimate

decision on an issue cannot be squared with the reasoning used to reach that decision.

See, e.g., Coble v. Coble, 300 N.C. 708, 714 (1980); Lackey v. Hamlet City Bd. of Educ.,

257 N.C. 78, 84 (1962). Accordingly, we vacate the trial court’s order and remand for

further proceedings.

III. Potential conflicts of interest & inadequate representation

Because we vacate and remand this matter to address the inconsistent class

definitions in the order, we need not address all of defendants’ arguments in this

appeal, many of which may be mooted by entry of a new order on remand. But several

of defendants’ arguments are intertwined with the mismatched class definitions and

warrant further discussion to guide the trial court’s analysis on remand.

The first of these issues concerns potential conflicts of interest within the class.

To obtain class certification, the named plaintiffs must show that “there is no conflict

of interest between them and the members of the class who are not named parties, so

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that the interests of the unnamed class members will be adequately and fairly

protected.” Crow, 319 N.C. at 282. Likewise, the named plaintiffs must show that

there are no conflicts within the broader class that prevent class member interests

from aligning on key factual or legal questions. Boucher v. Syracuse Univ., 164 F.3d

113, 118–19 (2d Cir. 1999). These intraclass conflicts, depending on their extent,

could require certification of subclasses with separate counsel, or could preclude class

certification altogether. Id.; Ortiz v. Fibreboard Corp., 527 U.S. 815, 864–65 (1999).

Here, some of plaintiffs’ claims raise potential conflict-of-interest concerns. For

example, plaintiffs’ contract claim relies on the Court of Appeals’ holding in Jones v.

Capitol Broad. Co., Inc., 128 N.C. App. 271, 273–74 (1998). In Jones, the plaintiff

filled out an entry form for a public raffle, with hopes of winning a new Ford F-150

pickup truck. Id. at 272. After the plaintiff submitted the form, defendants called

plaintiff and informed him that he had won the truck. Id. Later that day, defendants

again called plaintiff to tell him that he had not won the contest and the truck had

been given to someone else. Id. at 272–73.

The Court of Appeals held that this type of contest can create contractual

rights. Id. at 273. Relying on cases from other jurisdictions, the court held that

“advertising a promotion contest to the public is in the nature of an offer. An

enforceable contract is formed when a party accepts that offer and consideration is

provided by entering the contest and complying with all of the terms of the offer.” Id.

at 274.

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Importantly, under the contract theory articulated in Jones, the contest

participant must have complied with “all of the terms of the offer”—meaning the

contest rules set out in the promotion. Id.

Assuming plaintiffs proceed under the contract theory articulated in Jones, the

requirement that contest participants must have complied with all terms of the offer

could create potential conflicts of interest among class members. The “terms of the

offer” in these contest cases generally are understood to mean the specific rules or

instructions contained in the promotional material. Id.

The flyer in this case contains instructions telling winners to call the event

hotline number and then go to the dealership immediately to claim their prize:

HOW TO WIN: SSCRATCH [sic] OFF THE CIRCLE IN THE DICE BELOW AND MATCH THE ACTIVATION CODE. IF THE SCRATCH OFF BELOW MATCHES ONE OF THE SIX LUCKY NUMBER GAME PRIZE BOXES, YOU ARE A GUARANTEED WINNER OF ONE OF THESE PRIZES! CALL THE EVENT HOTLINE NOW AT 980.289.4680 & PROCEED TO NISSAN OF SHELBY IMMEDIATELY!

At the bottom of the flyer, there are additional instructions stating that

participants whose scratch-off reveals winning numbers should “call the event

hotline” and “proceed to the dealership immediately to claim your prize.”

On the reverse side of the flyer, large instructions next to the “SWEEPSTAKES

PRIZE BOARD” with images of the prizes states: “If your scratch off matches a lucky

number prize box YOU HAVE WON! CALL 908.289.4680 & be sure to have your

activation code ready. Then, come to dealership to claim your prize!”

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Finally, in very small print at the bottom of the flyer, there is a lengthy

statement with more specific contest rules, such as information about who is eligible

and when the contest expires. Those rules state that “in order for the grand prize to

be awarded, the randomly selected individual designated to receive the winning mail

piece must redeem the mail piece in person, and their name and address must match

the information on file with promoter.” These fine-print rules do not mention a

requirement to call the event hotline.

If, as plaintiffs allege, this contest language is an offer under Jones, then

acceptance of the offer requires complying with the specific terms set out in the offer.

Jones, 128 N.C. App. at 274. This raises a thorny question about the purported

contract language in this case: Is calling the event hotline a term of this purported

contract? After all, the promotional flyer repeatedly instructs contestants to do so

before going to the dealership to claim the prize.

The answer to this question is meaningful because, as noted above, the trial

court’s class certification analysis focused on a putative class (the so-called “Ups”)

that both called the hotline and went to the dealership. To this potential class,

assessing whether a call to the hotline is a contract term or not is irrelevant, because

they complied with that potential contract term.

By contrast, the class that the trial court actually certified—everyone who

received the winning contest flyer and then went to the dealership—includes an

unknown number of potential class members who did not call the event hotline.

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Indeed, there is even evidence in the record suggesting that one of the named

plaintiffs, Marla Lepley-Starr, did not call the event hotline as alleged in the

complaint (the record suggests she may have called the dealership directly and

spoken to a sales agent).

Assuming plaintiffs established a valid contract under Jones, class members

who did not call the event hotline could face contract hurdles that other class

members do not. This is precisely the sort of potential conflict that must be examined

and resolved in the class certification order. Crow, 319 N.C. at 282.

Thus, on remand, the trial court should examine whether the proposed class

creates conflicts of interest and, if so, take appropriate steps to remedy the conflict,

such as dividing the class into subclasses with separate counsel, or denying class

certification of this proposed class altogether. Beroth Oil Co. v. N.C. Dep’t of Transp.,

367 N.C. 333, 343 (2014); Dewalt v. Hooks, 382 N.C. 340, 350 (2022); Ortiz, 527 U.S.

at 864–65; Boucher, 164 F.3d at 118–19.

IV. Potential inefficiencies in the class

Another issue highlighted by the mismatch in class definitions is the potential

for inefficiencies that could render class certification inappropriate.

Before certifying a class, the trial court must balance the potential benefits of

certifying the proposed class against any “inefficiency or other drawbacks.” Crow, 319

N.C. at 284. The entire notion of class actions is grounded in this concept of efficiency;

class actions provide a means for potential litigants with valid legal claims to have

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those claims “aggregated in an efficient and economically reasonable manner.”

Maffei, 316 N.C. at 620.

Thus, although class certification analysis ordinarily does not involve an

inquiry into the merits of the plaintiffs’ claims, it is appropriate for the trial court to

consider, as a matter of law, what remedies would be available if the plaintiffs

prevailed on their claims.

In Maffei, for example, the trial court determined that the “damages

recoverable by any one member of the proposed class could not exceed $.29,” and

therefore “certification of this action as a class action would be inadvisable, inefficient

and inappropriate.” Id. at 617.

We affirmed the trial court’s ruling, holding that class members’ recovery

“would conceivably not even cover the cost of postage and stationery for a claimant to

notify the court of his inclusion within the class.” Id. at 621. We further held that,

when “balancing the costs of litigation against the likely benefits,” the costs of

administering a class action, compared to the plaintiffs’ potential recovery, may

render the class action so inefficient that it does not warrant certification. Id.

On remand in this case, there are similar analyses that may be appropriate,

depending on the class actually certified. For example, the complaint asserts claims

for unfair and deceptive trade practices and negligence. The remedy for both

negligence claims and unfair and deceptive trade practices claims is damages based

on the actual injury suffered by the claimant. Hansley v. Jamesville & Washington

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R.R. Co., 115 N.C. 602, 605 (1894) (negligence); Pearce v. Am. Def. Life Ins. Co., 316

N.C. 461, 471 (1986) (unfair and deceptive trade practices).

Defendants contend that the only actual injury applicable to these claims is

potential class members’ wasted time traveling to the dealership and unsuccessfully

attempting to claim the grand prize. The value of this wasted time, defendants

contend, is so “de minimis” that it precludes class certification under Maffei.

Plaintiffs, by contrast, contend that each class member suffered an actual injury

equal to “the $20,000 grand prize” itself.

On remand, the trial court should examine the potential recovery available for

each of plaintiffs’ claims and assess whether some or all of those claims present the

problem identified by Maffei, where the costs of litigating that claim so greatly

exceeds class members’ potential damages that it renders class certification

prohibitively inefficient. 316 N.C. at 617, 621. If so, the court should consider

whether, in its discretion, some or all of plaintiffs’ claims are inappropriate for class

certification.

Conclusion

Because the trial court’s class certification order is internally inconsistent, we

vacate that order and remand for further proceedings.

VACATED AND REMANDED.

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