State Competition with Private Business

Last updated 09.08.06

(Adapted with the permission of the North Carolina State University Office of Legal Affairs)

DEFINITION:

In general, the Umstead Act (the "Act") prohibits North Carolina government agencies from competing with the private commercial activities of North Carolina citizens. The University of North Carolina at Charlotte and its employees must comply with the Act. Violations may be punished as a criminal misdemeanor.  G.S. 66-58(a).

The Act specifically prohibits North Carolina government agencies, including UNC Charlotte from: 

1. directly or indirectly selling goods in competition with N.C. citizens;
2. rendering services to the public that are ordinarily provided by private businesses;
3. leasing space in a state owned or operated building for purposes of selling goods or rendering services in competition with private business; 
4. contracting with anyone to sell goods or render services in competition with private business.

However, as discussed below, numerous exceptions to the statute allow state agencies to conduct limited commercial activities.

EXCEPTIONS INVOLVING UNIVERSITY ACTIVITIES:

Five of the exceptions specifically permit the university to conduct certain commercial activities.

1. The first statutory exception (G.S. 66-58(b)(8)) allows state universities to engage in the following activities:
   1. providing utilities and other services operated at the time the law was passed  (1929) are "grandfathered";
   2. selling items that are incident to educational research or the operation of  instructional departments;
   3. selling food, books, and minor merchandise to employees, students, and their families;
   4. selling food and merchandise to guests invited to the university for meetings or conventions;
   5. anything incident to operation of Halton Arena;
   6. anything related to Millenial Campus operations;
   7. student health services;
   8. providing University-related services or selling University-related merchandise to alumni of the University and members of their immediate families;
   9. activities that enable the community in which the constituent institution or other University entity is located, or the people of the State to utilize the University's facilities, equipment, or expertise; and
   10. activities that further the mission of the University as stated in G.S. 116-1.
        
2. A second exception allows the sale of learned journals, works of art, books or publications of the University. G.S. 66-58(c)(2).
    
3. A third exception allows state universities to operate campus stores where profits are used for student scholarships. Campus stores may sell educational supplies, gift items, and personal use items. However, a campus store may only sell to students and their families, employees and their families, and individuals who are on campus for a purpose other than just to buy goods from the university store. Only educational  supplies, gift items, and personal use items may be sold. G.S. 66-58(c)(3).

   In 1989, the U.N.C.-Chapel Hill campus store stopped selling crock-pots and other small appliances after local merchants complained.  However, in 1994, although local store owners complained, the District Attorney refused to prosecute U.N.C.-C.H. for selling such items as children's books. The statute is unclear concerning the types of items that may be sold, other than educational items.

4. Another exception allows the sale of products from experimental stations or test farms. G.S. 66-58(c)(1).

DEFENSES:

1. The simplest defense is to establish a clear connection between the goods sold or the service rendered and the University's educational  purpose. In 1986, the NC Attorney General stated that activities which are incidental to the legitimate function of a state agency are not violations of the Umstead Act. (Attorney General's Opinion, March 4, 1986, 55 NCAG 101). The function of the university is to educate, so the law permits any sale of goods or services that are a function of educational operations.
    
2. A federal court in North Carolina has ruled that the Umstead Act creates an exclusive remedy. This means that although an agency or employee may be found criminally guilty of a misdemeanor, a private citizen cannot sue in civil court. (See Bd. Of Governors v. Helpingstine, 714 F. Supp. 167 (M.D.N.C. 1989).)
    
3. For employees of state institutions, the statute applies only when they act in their capacity as employees. G.S. 66-58(a).

IMPORTANT QUESTIONS TO ASK:

1. Is the activity a direct or indirect sale of goods, wares, or merchandise?
2. Does the activity offer a service that is normally performed by private businesses?
3. Is the activity directly related to the university's educational function?
4. Would the activity fall under any other exception, such as a product of an experimental station or test farm, a learned journal, or other exception?

**If the answer to 1 or 2 is "yes," then proceed to answer 3 and 4. If neither 3 or 4 is "yes," then the activity is likely prohibited by the Umstead Act.

MOST IMPORTANT: Consult with the Office of Legal Affairs if there is any question about the  applicability of the Umstead Act.

ADDITIONAL CONCERNS:

An activity that is acceptable under the Umstead Act may still be inappropriate or raise other legal issues. For example, revenue from an activity that is not substantially related to the educational mission, as determined by the IRS, may be subject to Unrelated Business Income Tax  (UBIT).