QK Healthcare, Inc. v. Insource, Inc.

• Decision Date: 08 May 2013
• Citation: 108 A.D.3d 56,2013 N.Y. Slip Op. 03312,965 N.Y.S.2d 133
• Parties: QK HEALTHCARE, INC., respondent, v. INSOURCE, INC., et al., appellants.
• Court: New York Supreme Court — Appellate Division

108 A.D.3d 56

965 N.Y.S.2d 133

2013 N.Y. Slip Op. 03312

QK HEALTHCARE, INC., respondent,

v.INSOURCE, INC., et al., appellants.

Supreme Court, Appellate Division, Second Department, New York.

May 8, 2013.

Proskauer Rose LLP, New York, N.Y. (Bruce E. Fader, Jordan B. Leader, and David S. Mordkoff of counsel), for appellants.

Edwards Wildman Palmer LLP, New York, N.Y. (Anthony J. Viola and Zachary W. Silverman of counsel), for respondent.

DANIEL D. ANGIOLILLO, J.P., THOMAS A. DICKERSON, JOHN M. LEVENTHAL, and CHERYL E. CHAMBERS, JJ.

LEVENTHAL, J.

In 2003, the plaintiff, QK Healthcare, Inc., a wholesaler of prescription drugs, purchased several thousand units of a drug named Tubersol from the defendants, InSource, Inc. (hereinafter InSource), and Henry Schein, Inc. (hereinafter Henry Schein), which are also prescription drug wholesalers. The plaintiff alleges that when it sought to arrange for the return of unsold units of the drug in 2005, the defendants violated their respective return policies by refusing to accept the return. The plaintiff contends that the defendants' conduct constituted an anticipatory repudiation of the contracts between the parties.

The principal issues we address on this appeal are whether the Supreme Court should have granted the defendants' motion to dismiss the first cause of action, which is to recover damages for anticipatory repudiation, pursuant to CPLR 3211(a)(7) for failure to state a cause of action, and pursuant to CPLR 3211(a)(5) as time-barred.

The complaint asserts that, in or about May 2003 to July 2003, the plaintiff purchased more than 36,000 units of Tubersol from InSource and that, in August 2003, the plaintiff purchased an additional 20,000 units of Tubersol from Henry Schein. The August 2003 order was filled by InSource, which shipped the merchandise to the plaintiff.

According to the complaint, the Tubersol that the plaintiff purchased from the defendants was manufactured by nonparty Aventis, which, consistent with standard industry practice, has a policy which provides that merchandise that has expired, or is about to expire, and remains unsold may be returned for credit or refund. In addition, the complaint avers that the standard practice in the wholesale pharmaceutical industry is that wholesalers will permit the return of merchandise that remains unsold and has expired, or is about to expire.

The complaint alleges that, at the time of the subject purchases, and all other relevant times, Aventis had a return policy which stated that products were returnable within the 6–month period prior to their expiration date, or no more than 12 months past their expiration date. The Aventis return policy, which was annexed to the complaint, states that refunds would be provided, inter alia, to those who had purchased merchandise either directly from Aventis, or indirectly through a wholesaler.

The complaint further alleges that, at the time of the subject purchases, and at all other relevant times, each defendant had a return policy. InSource's return policy states that products, within the 6–month period prior to their expiration date, or no greater than 6 months past their expiration date, could be returned for credit, minus a 15% processing fee. Henry Schein's return policy states that non-expired products were returnable if they could “be returned to the manufacturer for credit.” All returnable products would also be subject to a 15% handling fee if returned more than 30 days after the date of the invoice.

The Tubersol that the plaintiff purchased from the defendants all had the same expiration date of December 31, 2005. By December 2005, the plaintiff had been unable to sell 29,792 units of the Tubersol that it had purchased from the defendants. According to the plaintiff, the dollar value of the unsold drugs is almost $2,000,000. On or about December 23, 2005, approximately one week before the Tubersol was set to expire, the plaintiff contacted the defendants to “arrange for return” of the unsold units, consistent with the defendants' policies as well as custom and usage in the industry. However, the plaintiff alleges that the defendants refused to accept the return. Thereafter, a letter dated January 26, 2006, sent by Henry Schein's general counsel, reiterated the defendants' refusal to accept the return on the ground that they themselves could not return the expired product to Aventis.

The complaint further avers that the plaintiff attempted to mitigate its damages when, on or about February 1, 2006, to November 7, 2006, the plaintiff returned 29,792 units of the unsold units of Tubersol directly to Aventis via a returns processing company. Aventis gave the plaintiff a credit of $84 per unit for 1,200 units returned in February 2006, a “reduced” credit of $19 per unit for 5,000 other units, and no credit for the remaining 23,592 units.

The plaintiff commenced this action in July 2010 to recover damages for the defendants' anticipatory repudiation of the contracts between the parties by refusing to accept the unsold Tubersol. The plaintiff alleges that there was an implied term in the sales contract between the parties that the purchases were of merchandise “that ought to have been returnable” in accordance with the industry practice. The complaint contained a second cause of action that the plaintiff withdrew prior to the determination of the defendants' motion in the order that is the subject of this appeal.

The defendants moved, inter alia, to dismiss the first cause of action pursuant to CPLR 3211(a)(5) on the ground that it was time-barred, and pursuant to CPLR 3211(a)(7) for failure to state a cause of action. In support of their position that the first cause of action was time-barred, the defendants submitted that the claim was governed by the UCC because it arose out of the sale of pharmaceuticals, which were “goods” as defined by UCC 2–102. Thus, the defendants maintained that the claim was subject to the four-year statute of limitations applicable to contracts for the sale of goods under the UCC ( seeUCC 2–725[1] ). The defendants argued that the alleged anticipatory breach of contract occurred, and statute of limitations began to run, in late December 2005 when they unequivocally refused to accept the plaintiff's return. Accordingly, the defendants argued, the four-year limitations period expired at the end of 2009, and this action, commenced in July 2010, was time-barred.

The defendants further asserted that even if the Supreme Court found that the claim accrued at the time performance was due rather than at the time of the breach, the result would be the same. In this regard, the defendants argued that the fact that the plaintiff attempted to return the goods on December 23, 2005, demonstrated that the plaintiff itself believed that their obligation to accept the return already existed, or existed immediately upon the request. Thus, the defendants submitted that the alleged repudiation occurred concurrently with the time for performance, at the end of December 2005.

The defendants additionally argued that even if the action were not time-barred as against both of them, it was time-barred as against InSource, because the latest date the plaintiff could have returned the Tubersol to Insource under the parties' contract was June 30, 2006–six months after the drugs expired. Thus, the defendants argued, at the latest, the plaintiff's claim against InSource accrued in June 2006.

The defendants also contended that the first cause of action should be dismissed because it failed to state a cause of action to recover damages for anticipatory repudiation under UCC 2–610, which provides that an anticipatory repudiation occurs when “either party repudiates the contract with respect to a performance not yet due.” In support of its position, the defendants argued that a cause of action to recover damages for anticipatory repudiation is not available to a party who has fully performed under the contract, and here the plaintiff failed to allege that it owed any consideration or remaining performance to the defendants at the time of the alleged repudiation in December 2005. The defendants further argued that the plaintiff failed to plead that the defendants' alleged repudiation took place before the defendants' time for performance was due (rather than concurrently or after).

In opposition, the plaintiff argued that a quintessential case of anticipatory repudiation was presented here because the defendants repudiated their contractual obligations before the plaintiff actually returned the goods, and before they had processed the return or issued any credit. The plaintiff submitted that the complaint stated a cause of action to recover damages for anticipatory repudiation pursuant to UCC 2–610 since it alleged that the defendants refused to accept the returns consistent with their respective returns policies. The plaintiff further argued that it could maintain a cause of action for anticipatory repudiation because it had not yet fully performed under the terms of the contracts when the defendants repudiated. In this regard, the plaintiff argued that common sense dictated that a simple offer to return goods did not fulfill the obligation to physically deliver those goods to the entity accepting the return. The plaintiff further asserted that the defendants repudiated their obligations before their performance was due inasmuch as the defendants were obligated to both accept the return and to give the plaintiff a credit, which they did not do.

The plaintiff also asserted that it had timely interposed the cause of action alleging anticipatory repudiation. In this regard, the plaintiff contended that it had the right to return the product to InSource until June 30, 2006, and the right to return to Harry Schein until December 31, 2006. Following those dates, the plaintiff argued, UCC 2–610 required the defendants to “have had a commercially reasonable time...