Clarity on the Economic-Loss Rule and Section 75-1.1 (at least in WDNC)
Ellis & Winters
In Foodbuy, LLC v. Gregory Packaging, Inc., (Sept. 25, 2018), Chief Judge Frank D. Whitney of the Western District of North Carolina issued an opinion after a bench trial on dueling breach of contract claims. One of the parties also added tort-based claims and a N.C. Gen. Stat. § 75-1.1 claim. This post examines Judge Whitney’s reasoning in applying the economic-loss rule to bar the section 75-1.1 claim.
The invoicing squeeze
As a group purchasing organization, Foodbuy offers its members special pricing on food through its relationships with independent food distributors. Gregory Packaging agreed to provide its Suncup juice product—think the small cups of juice we all remember from our elementary school days—to Foodbuy distributors. Those distributors then sold the products to Foodbuy members.
Foodbuy and Gregory entered into a supplier agreement in March 2011. Under the agreement, Gregory extended favorable pricing to the Foodbuy members for purchases made through certain distributors.
Each month, Foodbuy would invoice Gregory based on the number of cases of Gregory juices purchased through Foodbuy distributors. This invoice included a rebate based on the volume of purchases and a growth incentive. Gregory would then review the invoices and make adjustments based on whether customers were actually Foodbuy members.
Foodbuy alleged that the agreement allowed it to add new members. Gregory alleged that the agreement allowed Foodbuy members to purchase outside the Foodbuy arrangement. These two issues came to a head in 2014. Foodbuy added a new member that was already a large customer of Gregory that was already receiving significantly discounted pricing.
Foodbuy alleged that it allowed Gregory to exempt this existing customer from their arrangement (to avoid potentially having the existing relationship calculated as part of the volume premium or growth incentive) and offered to make a similar accommodation for any other similar customers.
Gregory alleged that Foodbuy’s billing was incorrect and included falsified sales to overcharge Gregory–to the tune of millions of cases of juice. Based on its suspicions, Gregory did not pay the February-August 2015 invoices.
Foodbuy then sued Gregory on contract-based theories. Gregory Packaging responded with nine counterclaims, including a section 75-1.1 claim. Two claims (based in fraud) were dismissed at trial, but the remaining seven counterclaims proceeded through trial.
A breach of contract by any other name would not smell as sweet
Judge Whitney ultimately determined that both parties breached the Agreement. Foodbuy overcharged Gregory Packaging, and Gregory Packaging failed to pay invoices when due. The court awarded Gregory Packaging $7 million in damages and $2 million in interest.
For this post, however, we are focused on Judge Whitney’s treatment of the section 75-1.1 counterclaim.
Judge Whitney applied the economic-loss rule to bar the claim. He began his opinion on issue noting that “the economic loss rule bars recovery on Gregory Packaging’s causes of action for tortious interference with contract and unfair and deceptive trade practices.” Judge Whitney relied on a May 2018 Fourth Circuit decision. In Legacy Data Access, Inc. v. Cadrillion, LLC (889 F.3d 158), the Fourth Circuit traced the history of the economic-loss rule in North Carolina. The rule, explained by the Fourth Circuit, is designed to maintain the distinction between punishment-based tort law and contract law which aims to place an injured party in the position it would have occupied if the parties adhered to the terms of the contract.
At trial, Gregory Packaging had not put on evidence of any independent duty owed outside the scope of the contract. Judge Whitney therefore applied the economic-loss rule to bar the section 75.1.1 claim.
Interestingly, Foodbuy had not argued that the economic loss rule on the section 75-1.1 claim. Instead, it argued that the conduct did not rise to the level of a substantial aggravating factor. Judge Whitney did recognize this argument as a secondary basis for his dismissal, after addressing the economic-loss rule. Quoting a North Carolina Business Court decision in Post v. Avita Drugs, LLC, No. 17 CVS 798, 2017 WL 4582151, at *4–5 (N.C. Super. Oct. 11, 2017), Judge Whitney found that Gregory Packaging had failed to prove at trial that the circumstances of breach exhibited clear deception. Even Gregory Packaging appeared to be pointing the Court towards the economic-loss rule, beginning its trial brief with the statement that “[a]t the heart of this case is contractual interpretation.”
Lessons for litigants (at least in the WDNC)
The winds of the economic-loss rule seem to be shifting in favor of its application to section 75-1.1 claims. At least for now, courts seem to be moving away from the direction forecast by the North Carolina Court of Appeals’ decision in Bradley Woodcraft, Inc. v. Bodden, which limited the economic-loss rule to negligence-based tort claims. Foodbuy provides a party defending a Section 75-1.1 claim with a basis for applying the economic-loss rule to defend the 75-1.1 claims arising from a relationship based in contract.
Author: Jeremy Falcone