Breach of contract case dismissed after company waited too long to file lawsuit against Sears

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by Jay Pate

Apex Digital, Incorporated sued Sears, Roebuck & Company to collect money for goods Apex sold to Sears. Apex alleged that Sears breached their contract by refusing to pay the total amount it owed to Apex for goods delivered. Sears argued that this action was barred by an applicable four-year statute of limitations. The district court agreed with Sears and found that Apex failed to file the breach of contract lawsuit within the requisite time period. All of Apex’s claims—seeking to recover more than $8 million Apex claims it is owed for goods sold to Sears—were dismissed. Apex appealed, but the Seventh Circuit Court of Appeals has now affirmed the judgment in favor of Sears. Apex Digital, Inc. v. Sears, Roebuck & Co., NO. 12-3115 (7th Cir. Nov 20, 2013).

Apex and Sears entered into the Sears Roebuck & Co. Universal Terms and Conditions (the “UTC”) agreement in 2003. The purpose of the agreement was to allow Sears, a retailer, to place orders for goods with Apex, a manufacturer of digital cameras, televisions, DVD players, and other consumer electronics. The UTC covered all merchandise sold by Apex to Sears. Following the delivery of goods, Apex sent electronic invoices to Sears. Though not explicitly written in the UTC, both parties’ records reflect a “Net 60” payment term, meaning payment was due sixty days from the date of the invoice. The parties’ actions also indicate that they were operating under this payment arrangement. Apex accounted for its invoices to be due sixty days after issuance of each invoice, and Sears’ records set forth the payment terms between Sears and Apex as “Net 60 Receipt of Goods.”

Upon receipt of an invoice from Apex, Sears’ accounts payable system confirmed the terms of the invoice and then paid Apex according to the “Net 60” payment term.

However, Sears did not always pay the full amount owed. Sears withheld money for expected returns and other deductions to which it believed that it would be entitled in the future. Deductions that were disputed by Apex were labeled “charge-back deductions” on Apex’s Invoice Report.

Apex also contended that Sears owed amounts for unpaid invoices. The last invoices listed by Apex that remained outstanding were dated November 9, 2004, and constituted the final transaction between the two parties. Thus, according to the “Net 60” provision, these invoices were due no later than January 8, 2005. All of the other invoices for goods that Sears purchased from Apex pre-date the November 9, 2004 invoices.

On or about July 6, 2004, Sears implemented Program Agreement 99671 (“PA 99671”) to create a return reserve on Apex’s account. The return reserve was an internal accounting mechanism used to place a negative dollar deduction on Apex’s account. In other words, Sears would hold back any payment to Apex until the amount showing owed by Sears exceeded the amount of the reserve.

Apex alleged that Sears owed $8,185,302.24. Apex’s lawsuit alleged that Sears withheld money and stopped paying Apex for goods that Apex delivered. Sears responded by arguing that that Apex’s complaint was barred by the applicable four-year statute of limitations. The lawsuit was filed on March 6, 2009, and, according to the “Net 60” payment term, the latest expected payment would have been due no later than January 8, 2005 (because the last invoice received was from November 9, 2004).

Apex argued that the amounts in question could not have been due earlier than January 2006 as Sears’ payments were advances against a debt. Apex also suggested that Sears’ payment obligations were held open until Apex determined the full amount owed through a final accounting that was to be done once the business relationship ended.

Regarding the deductions, the district court found that Apex’s argument was contrary to the explicit language found in the UTC, which allows Sears to unilaterally deduct from the amount it owed on the invoices. Rather than making advance payments to Apex, Sears paid each invoice separately and took deductions as it deemed appropriate. In short, each invoice and deduction was its own transaction. The last deduction occurred on December 21, 2004, which is when the statute of limitations began to run. Therefore, Apex’s March 6, 2009 complaint was filed four years too late and barred by the statute of limitations.

As for the unpaid invoices, Apex argued that the “Net 60” term, taken from invoices, did not apply. It argued that any change to the UTC had to be in writing by Sears and, since the invoices were not signed by Sears, the “Net 60” provision was invalid. The district court concluded that while the UTC addressed electronic payment of Apex’s invoices, it did not set forth a specific time that payments would be due. Thus, the parties’ course of dealing was able to supplement the written agreement. As a result, Apex knew or should have known that the payment was due sixty days after the receipt of the goods. Therefore, the district court found that the breach occurred no later than January 8, 2005, and Apex’s March 6, 2009 complaint was untimely filed and barred by the statute of limitations.

Apex also alleged that Sears owed it for charge-back deductions that date back to December 21, 2004. Apex noted such deductions each time Sears withheld money from a payment that Apex disagreed with. Again, Apex argues that these deductions were not actionable at the time they were taken; rather, a final accounting had to take place in order to determine the final obligations of the parties. But the parties were clearly operating under the “Net 60” payment term and therefore each invoice was being paid individually. Thus, each deduction was actionable at the time it was taken. Sears was not making advance payments in anticipation of a final accounting. Sears paid each invoice individually and decided for each invoice how much money was to be deducted. It provided this information to Apex and only sent the money that it believed was owed.

As a result, Apex was put on notice that Sears was not going to pay the deductions after each invoice. Apex even marked these “wrongful” deductions in its own Invoice Report. Nonetheless, for more than four years, Apex sat on its right to sue for money that it was allegedly owed by Sears. This is the precise behavior that Section 2–725 of the UCC prohibits. The court thus concluded that Apex’s claim had expired.