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More Developments on Section 75-1.1 and the Economic-Loss Rule

Ellis Winters

Ellis & Winters

As we’ve noted before, many 75-1.1 cases involve food products.

Our appetites, of course, are always whetted when section 75-1.1, the economic-loss rule, and the “substantial aggravating circumstances” doctrine intersect.

We observed this intersection in a group of recent decisions by the U.S. District Court for the Eastern District of North Carolina. This post studies these decisions—which, no surprise, involve baked goods.

The Bimbo Cases

The plaintiffs in the Eastern District cases (we’ll call them the dealers) bought distribution routes that gave them the exclusive right, within a given territory, to resell Bimbo Foods baked goods to grocery chains and other customers. The dealers and Bimbo signed written agreements that governed their relationships.

In these arrangements, the dealers’ income consisted of a margin: the difference between the prices at which the dealers bought and resold Bimbo’s products. The dealers therefore became concerned when, in June 2013, Bimbo raised its prices to the dealers. This change shrank the dealers’ margins.

The dealers fought back. They organized a committee and negotiated with Bimbo to lower the prices that Bimbo had just raised. The negotiations, however, didn’t bear fruit.

Instead, Bimbo terminated the dealers’ agreements. Bimbo accused the dealers of booking false sales and committing other non-curable contract breaches.

Bimbo next allegedly seized the dealers’ distribution routes and operated them itself for several months. Bimbo said that it suffered over $43,000 in losses from operating these routes. Bimbo billed the dealers for these alleged operating losses.

The dealers sued Bimbo in four related cases in the Eastern District. (Each dealer filed two lawsuits: one related to the termination, and one related to the operating losses.) They alleged that Bimbo violated section 75-1.1 in two ways: (1) by wrongfully terminating their agreements, and (2) by charging them unreasonable fees. The dealers alleged that Bimbo took both actions to retaliate for the dealers’ protests against the lower margins.

Retaliation, the Economic-Loss Rule, and Section 75-1.1

Bimbo filed a mixture of motions to dismiss and summary-judgment motions against the dealers’ 75-1.1 claims. Bimbo argued, among other points, that the economic-loss rule barred the claims. The economic-loss rule says that a contract dispute generally does not state a tort claim. The concern is that if a plaintiff could recover tort damages, that outcome would disregard the expectations reflected in the parties’ contract.

As we showed in an earlier post, courts have not settled whether the economic-loss rule bars 75-1.1 claims. Courts often avoid this question by deciding that a contract-based 75-1.1 claim does not involve sufficiently egregious aggravating circumstances.

Judge Britt followed this same approach, but reached the opposite result. He declined to decide whether the economic-loss rule bars 75-1.1 claims. He concluded, however, that the facts alleged in these cases might indeed amount to substantial aggravating circumstances. He therefore denied Bimbo’s dispositive motions.

Judge Britt’s orders on the motions to dismiss are here and here. His orders on the summary-judgment motions are here and here.

These orders have at least two notable aspects.

First, Judge Britt chose not to decide whether the economic-loss rule bars 75-1.1 claims because, in his view, a federal court, sitting in diversity, should not extend state law to a significant degree.

Although this reasoning is not novel, it is important. Section 75-1.1 comes up in federal diversity cases all the time. If federal courts are not going to rule on whether the economic-loss rule precludes 75-1.1 claims, then it will become even more important for the North Carolina state courts to resolve this issue.

Now that rulings from the North Carolina Business Court are directly appealable to the North Carolina Supreme Court, the Supreme Court will be more likely to decide whether the economic-loss rule bars section 75-1.1 claims. Until then, however, this key issue under section 75-1.1 is likely to remain in debate.

Second, Judge Britt’s rulings might be helpful to other litigants who want to cast their adversaries’ contract breaches as 75-1.1 violations, not just as intentional breaches of contract. A 75-1.1 violation based on a contract breach usually requires facts that show deception. All four of Judge Britt’s orders, however, focus less on deception and more on motive. His orders seem to conclude that a bad motive for breaching a contract (here, retaliation) might transform a breach of contract into a 75-1.1 violation.

Time will tell whether the Bimbo decisions are sui generis or mark a meaningful shift in what qualifies as “substantial aggravating circumstances.” Either way, these decisions illustrate the ongoing uncertainty about the reach of section 75-1.1.

Author: Stephen Feldman

April 28, 2015
Posted in  Economic-Loss Rule