Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. N.C.: Terminated operator’s contract breach, unfair trade practices claims against Bimbo bakeries proceed, (Apr 15, 2015)

By Edward L. Puzzo, J.D.

Following the termination of his distribution agreement with Bimbo Foods Bakeries, an independent operator’s breach of contract and unfair trade practices claims were allowed to proceed by the federal district court in Raleigh, North Carolina (Ramsey v. Bimbo Foods Bakeries Order Distribution, LLC, April 10, 2015, Britt, W.). The operator’s fraud, breach of fiduciary duty, and negligence claims, however, were dismissed.

In 2008, Plaintiff Richard Ramsey entered into a distribution agreement with Bimbo Foods Bakeries and purchased a distribution route, giving him exclusive rights as an independent operator to purchase and resell Bimbo products to grocery store chains within a designated territory. The agreement called for Ramsey to be paid “on a percentage of sales or a margin on the sale of product.”

In June 2013, Bimbo announced that it would be reducing the margins it would pay Ramsey and other independent operators. Ramsey and most of the other independent operators reacted, according to Ramsey, by endeavoring to “fight the Defendant’s effort to unilaterally reduce margins.” Later, in December 2013, Bimbo terminated Ramsey’s distribution agreement on the grounds that he had failed to properly service one of the stores on his route.

Based upon the termination of his distributorship agreement, Ramsey brought claims against Bimbo for breach of contract, fraud, breach of fiduciary duty, negligence, and unfair and deceptive trade practices. The court dismissed the fraud, breach of fiduciary duty, and negligence claims, while ruling against the dismissal of the breach of contract and unfair trade practices claims.

Breach of Contract. Ramsey alleged that Bimbo breached the distribution agreement by charging him unreasonable expenses when operating his distribution route on his behalf. While conceding that the agreement allowed Bimbo to charge him for the reasonable expenses of operating his route, Ramsey contended that an expense charge of over $43,000 and the failure to earn any profit was “totally unreasonable.” Ramsey further alleged that Bimbo breached the agreement by only obtaining a “grossly devalued price” in the sale of his distribution rights. Bimbo countered that the pleading failed to plead any fact showing that the amounts charged were unreasonable, and provided only bare conclusory statements in support of his claim about the sale price of the distribution rights.

Ramsey had provided earnings and cost estimates for what the route should have earned based on his own history of sales, and had provided a market basis for his claims of a devalued sales price for distribution rights. The court found these to be more than conclusory statements and ruled that his breach of contract claims were plausible and should not be dismissed.

Economic loss rule. The Fourth Circuit, the court explained, applies the economic loss rule, which prohibits recovery for purely economic losses in tort when a contract exists to allocate risk. To pursue a tort claim in addition to a breach of contract claim concerning the same conduct, the plaintiff must allege a duty owed him by defendant that is separate and distinct from any duty owed under contract.

The court noted that Ramsey alleged purely economic damages, and that each of his claims arose out of Bimbo’s performance under the contract. Thus, the economic loss rule barred Ramsey’s claims of negligence, breach of fiduciary duty, and fraud, the court ruled. In addition, the fraud claim would have to be dismissed regardless of the economic loss rule, because Ramsey failed to allege that he was deceived by Bimbo’s false statements, a necessary element of a fraud claim in North Carolina.

Unfair and Deceptive Trade Practices. Initially, Bimbo contended that Ramsey’s unfair trade practices claim was barred by the economic loss rule, citing Bussian v. DaimlerChrysler Corp. 411 F. Supp. 2d 614 (M.D. N.C. 2006). The court, however, noted that the Bussian was limited to cases involving allegations of a defective product where the only damage alleged was to the product itself and the allegations of unfair trade practices were intertwined with the breach of contract or warranty claims. Since the instant case did not involve products liability, the Bussian ruling did not apply.

North Carolina courts have not decided whether the economic loss rule applied to UDTPA claims, the court noted. This court, sitting in diversity, stated that it would decline to create North Carolina common law by extending the economic loss rule to bar plaintiff’s UDTPA claim.

As to the merits of the unfair trade practices claim, the court explained that under the North Carolina Unfair and Deceptive Trade Practices Act (UDTPA), a plaintiff must show (1) defendant committed an unfair or deceptive act or practice; (2) the action in question was in or affecting commerce; and (3) the act proximately caused injury to the plaintiff.

Ramsey had alleged that, due to his opposition to Bimbo’s announced reduction in margin payments, Bimbo had retaliated by terminating his distribution agreement, charging him unreasonable expenses in the operation of his route, and selling his distribution rights at a grossly devalued price, all as a deterrent message to other independent operators that they might suffer termination and other financial damage if they continued to oppose the reduction in margin payments.

These allegations, if proven, would be more than a simple breach of contract action and would amount to substantially aggravating circumstances that stated a valid claim for relief under the UDTPA, the court ruled. Thus the unfair trade practices claim should not be dismissed, the court ruled.

Consolidation. In a separate action, initially filed in state court and later removed to federal court, Ramsey challenged his termination, alleging breach of contract and violation of North Carolina’s Unfair and Deceptive Trade Practices Act (UDTPA). On March 24, 2015, that lawsuit (Civil Action No. 5:14-CV-26-BR) survived Bimbo’s motion to dismiss, and the matter remains pending.

In January 2015, Ramsey brought this action (Civil Action No. 5:15-CV-6-BR), making the same allegations. Bimbo sought to dismiss this case as duplicative, but the court instead consolidated it with the above-referenced matter, directing all future filings to be made under the 5:14-CV-26-BR case number.

Attorneys: Edgar R. Bain (Bain, Buzzard & McRae, LLP) for Richard Ramsey. Melanie Black Dubis (Parker, Poe, Adams & Bernstein, LLP) for Bimbo Foods Bakeries Distribution, LLC

Companies: Bimbo Foods Bakeries Distribution, LLC; Bimbo Foods Bakeries Distribution, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices NorthCarolinaNews