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Heiman v. Bimbo Foods Bakeries Distribution Co.

Court of Appeals for the Seventh Circuit
902 F.3d 715 (2018)
ELI5:

Rule of Law:

In a federal diversity action, the law of the forum state governs procedural matters, including statutes of limitations and the statutory classification of a contract as one for the sale of goods or services. Distributorship agreements are generally classified as contracts for the sale of goods, subjecting them to the Uniform Commercial Code's four-year statute of limitations.


Facts:

  • Starting in 2000, JTE, Inc. operated as a distributor for Bimbo Foods, selling baked goods under brands like Brownberry in suburban Chicago.
  • The distribution agreement between the parties had no fixed duration but allowed for termination in the event of a non-curable breach.
  • In 2008, Bimbo Foods devised a scheme to force JTE out of the contract to replace them with a distributor who would accept a lower profit percentage (18% versus JTE's 22%).
  • Bimbo employees fabricated breaches by removing JTE-delivered products from grocery store shelves, photographing the empty shelves as proof of poor service, and then returning the products.
  • Bimbo Foods unilaterally terminated JTE's agreement in January 2011, citing these fabricated breaches as cause.
  • In late 2011, Bimbo Foods forced JTE to sell its distribution rights to new distributors.
  • JTE claims it did not learn the full extent of the scheme regarding the fabricated breaches until late 2013 or early 2014.
  • JTE filed a lawsuit against Bimbo Foods in May 2017 claiming breach of contract and tortious interference.

Procedural Posture:

  • JTE, Inc. and John Heiman sued Bimbo Foods in the United States District Court for the Northern District of Illinois.
  • The District Court dismissed John Heiman as a plaintiff because he was not a party to the contract.
  • Bimbo Foods filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing the claims were time-barred.
  • The District Court granted the motion to dismiss, ruling that the statutes of limitations had expired for both breach of contract and tortious interference.
  • JTE appealed the dismissal to the United States Court of Appeals for the Seventh Circuit.

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Issue:

Is a distributorship agreement that involves both the transfer of products and the performance of services subject to the Uniform Commercial Code's four-year statute of limitations for the sale of goods under the law of the forum state?


Opinions:

Majority - Chief Judge Wood

Yes, a distributorship agreement is primarily a contract for the sale of goods and is therefore governed by the Uniform Commercial Code's four-year statute of limitations under Illinois law. Although the contract contained a choice-of-law provision selecting New York law, Illinois (the forum state) treats statutes of limitations as procedural matters governed by its own laws. Furthermore, the determination of whether a contract constitutes a 'contract for sale' under the UCC is a matter of statutory interpretation, not contract interpretation; therefore, the forum's statutory standards apply. Applying the 'primary purpose' test, the court reasoned that while the agreement involved services, its predominant purpose was the sale of goods to consumers. Consequently, the claim filed in 2017 regarding a 2011 breach was time-barred. Regarding the tortious interference claim, the court rejected the application of the discovery rule, noting that the plaintiff knew they had been injured and that the accusations were false in 2011, which was sufficient to start the limitations clock.



Analysis:

This decision reinforces the principle that federal courts sitting in diversity apply the procedural law of the forum state, even when a contract contains a choice-of-law provision. The court draws a sharp distinction between interpreting the terms of a contract (substantive) and interpreting the statutes that govern legal deadlines (procedural). By affirming that distributorship agreements are predominantly contracts for the sale of goods, the Seventh Circuit confirms that the shorter four-year UCC statute of limitations applies to these relationships rather than the typically longer periods for general written contracts. This places a burden on distributors to file suit quickly upon termination. Additionally, the ruling on the discovery rule clarifies that a plaintiff need not know the full details of a defendant's scheme to sue; knowing of the injury and its wrongful nature is sufficient to trigger the statute of limitations.

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