U.S. Court of Appeals for the Fourth Circuit, Foodbuy, LLC v. Gregory Packaging, Inc., Docket No. 19-1692

 

Distribution Agreement

Supplier Agreement (The “Agreement”)

Non-Exclusive Commercial Relationship

Group Purchasing Organization (“GPO”)

Contract Drafting

Contract Interpretation: Custom or Usage

 

Unfair and Deceptive Trade Practice

Unfair Competition

Consumer Law

North Carolina Law

 

 

GPI manufactures juice cups, which it supplies to institutions like schools and hospitals. Foodbuy is a Group Purchasing Organization (“GPO”), which pools institutional purchasers so that their aggregated buying power can be used as leverage to negotiate favorable pricing with manufacturers. From 2011 through 2015, GPI and Foodbuy were engaged in a non-exclusive commercial relationship, which was memorialized in a supplier agreement (the “Agreement”). That Agreement lies at the heart of this dispute.

 

(…) The third way GPI (and similar manufacturers) sells its products—which is the most relevant here—is known as a “GPO sale.” As with a direct deal, the customer pays the distributor directly, but does so at the GPO-negotiated price rather than a price negotiated directly with the manufacturer. When supplying the customer, the distributor deviates to that price. The GPO then invoices GPI for a “volume allowance” rebate for each case of juice sold. The GPO passes along some—but not all—of that allowance to the customer. As a result, the customer’s net price is the GPO-negotiated price minus the portion of the volume allowance that GPO passes along to it.

 

Consistent with this industry practice, Foodbuy and GPI negotiated the Agreement in 2011. Under its terms, GPI agreed to pay Foodbuy a volume allowance based on the quantity of its products purchased “through the Foodbuy program at the Foodbuy price” by Committed Customers through Foodbuy Distributors. GPI also contracted to pay Foodbuy various “growth incentives” based on incremental increases in GPI’s products purchased by Committed Customers through Foodbuy Distributors. Under the Agreement, Foodbuy invoiced GPI for the allowance due each month based on data it received from Foodbuy Distributors.

 

The Agreement defined “Committed Customer” as “a client of Foodbuy that has agreed in writing to authorize Foodbuy to negotiate the commercial terms of purchasing contracts on its behalf or has outsourced all or a portion of its purchasing functions to Foodbuy by written agreement.” J.A. 1559. Significantly, Committed Customers were allowed to buy “off-contract,” outside of Foodbuy’s program. Thus, Foodbuy customers could buy at other pricing when a better option was available to them, when they had a direct deal, or when a certain distributor was out of stock for a product and they had to go to another distributor. Indeed, on occasion, distributors would offer better pricing than the Foodbuy price.

The Agreement also contained a non-solicitation provision in Section 18, which provided:

During the term of this Agreement, absent prior written consent from Foodbuy, GPI will refrain from (i) soliciting any Foodbuy Committed Customer to procure products from GPI outside of the Committed Customer’s relationship with Foodbuy, or (ii) otherwise arranging any procurement relationship, directly, with any Committed Customer, wherein GPI procures products for such Committed Customer.

J.A. 1561–62. At trial, one of Foodbuy’s witnesses testified that it included the solicitation ban because it did not want GPI “going directly to the Committed Customer without Foodbuy’s written consent and engaging them directly and excluding Foodbuy from the commercial relationship.” J.A. 821.

 

(…) (Citing Bank of Am., N.C. v. Old Republic Ins. Co. 4 F. Supp. 3d 790, 796 (W.D.N.C. 2014) (“A custom or usage may be proved in explanation and qualification of terms of a contract which otherwise would be ambiguous.”)). “The evidence showed both Foodbuy and GPI approached the negotiation and decision to enter into the Agreement as actors intimately familiar with the usual and standard practices of the food service industry.” And “the evidence showed the custom and practice of the industry is that a volume allowance is not owed for cases of product sold outside of a GPO’s (Foodbuy’s) program. Indeed, that is why ‘off-contract’ is an industry term.”

 

(…) As a result, the court held that Foodbuy had breached the Agreement by charging GPI for every case of juice sold regardless of whether it was purchased through the Foodbuy program.

 

Unfair and deceptive trade practice under North Carolina law?

Under the UDTPA, commercial entities can pursue treble damages against parties who commit unfair and deceptive trade practices or unfair methods of competition. To succeed on such a claim, the plaintiff must show that the defendant committed: “‘(1) an unfair or deceptive act or practice, or an unfair method of competition; (2) in or affecting commerce; (3) which proximately caused actual injury to the plaintiff or to his business.’”

 

McLamb v. T.P. Inc., 619 S.E.2d 577, 582 (N.C. Ct. App. 2005). “‘A practice is unfair when it offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.’” Walker v. Fleetwood Homes of N.C., Inc., 653 S.E.2d 393, 399 (N.C. 2007). A practice is deceptive if it has a “tendency or capacity to deceive.” RD & J Props. v. Lauralea-Dilton Enters., LLC, 600 S.E.2d 492, 501 (N.C. Ct. App. 2004). Though “‘a mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under’” the UDTPA, North Carolina courts have consistently held that a party may demonstrate and prove such a claim in conjunction with a breach of contract claim if it can show substantially aggravating and egregious circumstances attending the breach. See, e.g., Post v. Avita Drugs, LLC, No. 17-CVS-798, 2017 WL 4582151, at *4 (N.C. Super. Oct. 11, 2017). Examples of such aggravating and egregious behavior include: (1) lying and concealing a breach combined with acts to deter further investigation; and (2) intentional deception for the purpose of continuing to receive the benefits of an agreement.

 

(…) The UDTPA is not a tort; it is “‘the creation of statute’” and “‘neither wholly tortious nor wholly contractual in nature.’” Bernard v. Cent. Carolina Truck Sales, Inc., 314 S.E.2d 582, 584 (N.C. Ct. App. 1984) (alteration omitted). To the contrary, “an unfair and deceptive trade practices claim . . . is a different legal creature and not subject to the same defenses as traditional contract and tort claims.” Media Network, Inc. v. Long Haymes Carr, Inc., 678 S.E.2d 671, 683 (N.C. Ct. App. 2009).

 

Turning to the question of aggravating circumstances, we also agree with GPI that the court erred in conflating GPI’s UDTPA and fraud claims. “The elements required to be proved for fraud claims are dissimilar from those required under the UDTPA. Fraud contains elements of subjectivity of the perpetrator (intent) and the victim (actual reliance) . . . . UDTPA claims require neither intent of the actor nor actual reliance of the victim.” CBP Res., Inc. v. SGS Control Servs., Inc., 394 F. Supp. 2d 733, 740 (M.D.N.C. 2005); accord Marshall v. Miller, 276 S.E.2d 397, 401 (N.C. 1981) (explicitly rejecting any possible implication that a party must show bad faith in order to recover treble damages for a violation of the UDTPA). “Furthermore, what constitutes an unfair and deceptive trade practice is a matter of law and requires less burdensome elements of proof than fraud.” CBP Resources, Inc., 394 F. Supp. 2d at 740.

 

 

(U.S. Court of Appeals for the Fourth Circuit, Feb 1, 2021, Foodbuy, LLC v. Gregory Packaging, Inc., Docket No. 19-1692, Published)