The Franchise Memorandum

The United States Court of Appeals for the Seventh Circuit has affirmed a district court’s determination that a distributor’s claims were stale under the applicable statute of limitations. Heiman v. Bimbo Foods Bakeries Distrib. Co., 902 F.3d 715 (7th Cir. Aug. 30, 2018). Heiman’s company, JTE, distributed products for defendant Bimbo Foods under a distribution agreement that did not have a fixed duration and could be terminated in the event of a noncurable or untimely cured breach by one of the parties. The agreement also specified that New York law would govern all claims and disputes. The parties successfully operated under the agreement for a number of years until 2008, when Bimbo allegedly created a scheme to force JTE out of its distribution rights so that Bimbo could install a new distributor who was willing to accept a lower share of proceeds. JTE alleged that Bimbo began fabricating curable breaches, including filing false reports of poor customer service and creating staged photographs of empty store shelves. Ultimately, in 2011, when JTE refused to sell its distribution rights, Bimbo terminated JTE, citing the fabricated breaches as cause. JTE filed suit against Bimbo for breach of contract and tortious interference in May 2017. The district court determined that both claims were time-barred under the applicable statutes of limitations.

On appeal, JTE argued that the district court applied the wrong statute of limitations for its breach of contract claim, and failed to apply the discovery rule for its tortious interference claim. With regard to the breach of contract claim, although the parties’ agreement indicated that New York law would govern, the court observed that the choice-of-law rules of the forum state (in this case, Illinois) determine which state’s law applies. While Illinois honors express choice-of-law provisions for purposes of determining substantive legal rights, Illinois law considers statutes of limitations to be procedural issues governed by the law of the forum. Because the parties’ agreement qualified as a contract for the sale of goods under Illinois law, it was governed by the UCC’s four-year statute of limitations rather than the ten-year period applicable to other written contracts. As a result, JTE’s breach of contract claim was untimely. With regard to its tortious interference claim, JTE argued that under the Illinois fraud-discovery rule, its claim did not accrue until it discovered the full extent of Bimbo’s wrongdoing. The court disagreed, noting that JTE admitted to knowing that Bimbo was creating false complaints in 2011, and that JTE knew it was substantially performing its obligations at the time of the breaches. By the time Bimbo unilaterally terminated the parties’ agreement, JTE knew that it had been subject to wrongful conduct. Accordingly, the court held that the discovery rule did not apply, and that the applicable limitations period had lapsed.