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From Antitrust Law Daily, September 4, 2018

Contract for baked goods distribution was for sale of goods not services

By Gregory Kane, J.D., M.B.A.

A decision to dismiss as time-barred a breach of contract and tortious interference suit alleging a scheme by a Pennsylvania bakery to sabotage a distribution contract was affirmed by the U.S. Court of Appeals in Chicago. While Illinois has a 10-year statute of limitations for written contracts, the contract fell under the exception for a four-year statute of limitations as a transaction of goods rather than services (Heiman v. Bimbo Foods Bakeries Distribution Co., August 30, 2018, Wood, D.).

John Heiman, an Illinois resident, entered into a contract with Bimbo Food Bakeries Distribution Company, a Pennsylvania company, to distribute Bimbo’s baked goods in October 2000. Heiman assigned the contract to JTE, Inc., a company he founded and owned. In 2008, Bimbo allegedly began fabricating a series of curable breaches of contract, such as falsely reporting poor service or out-of-stock product at stores, in order to force JTE out as its distributor and reach an agreement with a distributor that would take a smaller percentage of the proceeds. JTE caught a Bimbo manager in the act in 2008 and, having confronted Bimbo, was assured such conduct would not happen again. The conduct persisted.

In January 2011, Bimbo breached the distribution agreement and unilaterally terminated the contract citing the fabricated breaches. Bimbo later forced JTE to sell its rights to new distributors. JTE allegedly did not learn the scope of the scheme to fabricate breaches until late 2013 or early 2014. Heiman sued Bimbo in May 2017 alleging breach of contract and tortious interference.

A Chicago court ruled Heiman was not party to the distribution agreement and second, because both claims were stale under the applicable statute of limitations. Key to the ruling was the finding that the contract was for sale of goods which limits the statute of limitations to four years rather than the 10-year statute of limitations for contract for services under Illinois law. JTE appealed the second ruling only, claiming that the district court had applied the wrong statute of limitations for the breach of contract claim.

Statute of limitations. The vast majority of jurisdictions, including Illinois, have found that distributorship agreements are predominantly for the sale of goods and therefore, under the primary purpose test, qualify as a contract for sale of goods. As such, the agreement is subject to the UCC’s four-year statute of limitation making JTE’s breach of contract claim untimely.

JTE argued that its tortious interference claim did not accrue until it discovered the full extent of Bimbo’s malfeasance. JTE had knowledge in 2011 that Bimbo had falsified curable breaches. By the time of the forced sale of its distribution right, JTE knew it had been harmed by Bimbo’s conduct even if it did not know the specifics of what Bimbo had done. That was sufficient to start the statute of limitations rolling. As such, the district court’s ruling was affirmed.

The case is No. 17-3366.

Attorneys: Peter J. Evans (Patterson Law Firm) for John Heiman and JTE, Inc. Stephanie L. Sweitzer (Morgan, Lewis & Bockius LLP) for Bimbo Foods Bakeries Distribution Co. f/k/a Bestfoods Baking Distribution Co.

Companies: JTE, Inc.; Bimbo Foods Bakeries Distribution Co. f/k/a Bestfoods Baking Distribution Co.

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