Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272 (7th Cir. 2018), analyzes the goods-versus-services dichotomy under the Uniform Commercial Code (UCC) and how that difference informs the applicable statute of limitations.
The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products. Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements. Plaintiff brought both contract- and tort-based claims against the Plaintiff.
The Breach of Contract Claims
The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.
In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206. A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach. For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).
With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.
To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract. The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.
Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services. But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders. The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs. Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.
Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes – typically applied in goods contracts, not services ones.
Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]
Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.
The Negligent Misrepresentation Claim
The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.
Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]
The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services. Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.
The case also demonstrates the continuing viability of the economic loss rule. Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.