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Nucal Foods, Inc v. Quality Egg LLC; et al

January 14, 2013

NUCAL FOODS, INC., PLAINTIFF,
v.
QUALITY EGG LLC; ET AL., DEFENDANTS.



ORDER

This matter comes before the court on the motion to dismiss in part plaintiff's first amended complaint filed by defendants Hillandale Farms of Iowa, Inc. ("Hillandale Farms"), Hillandale Farms of PA, Inc. ("Hillandale PA") and Hillandale Iowa LLC ("Hillandale LLC") (together, "defendants"). (ECF 66.) This motion was decided without a hearing. For the following reasons, defendants' motion to dismiss is GRANTED in part and DENIED in part.

I. ALLEGED FACTS AND PROCEDURAL HISTORY

This case arises out of a massive recall in August 2010 of shell eggs precipitated by an outbreak of salmonella enteritidis ("SE") that sickened as many as 62,000 people. (First Am. Compl. ¶ 1) ("FAC"). Plaintiff alleges that defendants became aware of a heightened risk of SE contamination at defendants' farms in early 2010. (Id. ¶ 6.) Plaintiff further alleges that defendants had actual knowledge, no later than March 2010, that many of their chicken houses were contaminated with SE, and that by June 2010, their hens also had tested positive for SE. (Id. ¶¶ 5, 7.) Plaintiff avers that despite this knowledge, defendants continued to sell plaintiff eggs from contaminated farms without warning plaintiff or regulators and without conducting tests on eggs from contaminated farms. (Id. ¶ 9.)

On July 9, 2010, new federal egg safety rules took effect. (Id. ¶ 13.) These rules require SE positive farms to divert eggs to other facilities or to keep them out of the market until tests confirm they are contamination free. (Id.) Plaintiff alleges defendants, through omissions and misrepresentations, failed to comply with these new rules; for example, defendants represented they would notify plaintiff of any SE positive environmental tests involving farms that produced eggs plaintiff purchased. (Id. ¶¶ 156-157.) Plaintiff alleges defendants acted upon their knowledge of the SE positive tests only when the FDA stepped in. (Id. ¶ 15.) Defendants then tested eggs produced at their farms and discovered about 170 SE-infected eggs. (Id. ¶ 16.) Defendants finally instituted a recall in August 2010. (Id. ¶ 1.) Before, during and after the recall, defendants allegedly obfuscated and failed to cooperate fully with the FDA and with the U.S. House of Representatives' inquiry into the SE outbreak. (Id. ¶¶ 15, 17.)

Plaintiff filed its initial complaint on November 18, 2010, alleging seven causes of action against three defendants, Quality Egg LLC ("Quality Egg"), Wright County Egg, and Hillandale Farms. (ECF 1.) The court granted plaintiff's motion to amend on January 27, 2012 (ECF 60) and plaintiff filed its amended complaint on January 30, 2012 (ECF 61). The amended complaint names eight defendants - Quality Egg, DeCoster Revocable Trust ("DeCoster Trust"), Austin "Jack" DeCoster, DeCoster Enterprises LLC ("DeCoster Enterprises"), Environ/Wright County Inc. ("Environ"), Hillandale Farms, Hillandale LLC, and Hillandale PA - alleging eight causes of action: 1) breach of implied warranty of merchantability against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 2) breach of implied warranty of fitness for particular purpose against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 3) breach of express warranty against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 4) fraud against all defendants; 5) negligence against all defendants; 6) equitable indemnification against all defendants; 7) negligent interference with prospective economic advantage against all defendants; and 8) unfair competition.*fn1

On August 15, 2012, defendants Jack DeCoster, DeCoster Trust, DeCoster Enterprises, and Environ/Wright County were dismissed from this action for lack of personal jurisdiction. (ECF 156.) The remaining defendants are the three Hillandale entities and Quality Egg.

The Hillandale defendants filed the motion addressed by this order on February 29, 2012, seeking to dismiss claims I and II against Hillandale PA and claims V and VII against all three Hillandale defendants. (ECF 66.) Defendants contend these claims are barred by the economic loss rule. (Id. at 5.) On April 20, 2012, the Hillandale defendants withdrew their motion as to claims I and II. (ECF 115 at 3.) Therefore, the court will consider only defendants' arguments seeking to dismiss plaintiff's negligence-based claims, claims V and

VII. II. STANDARD

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for "failure to state a claim upon which relief can be granted." A court may dismiss "based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

Although a complaint need contain only "a short and plain statement of the claim showing that the pleader is entitled to relief," FED. R. CIV. P. 8(a)(2), in order to survive a motion to dismiss this short and plain statement "must contain sufficient factual matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than "an unadorned, the-defendant-unlawfully-harmed-me accusation" or "'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action . . . .'" Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).

In making this context-specific evaluation, this court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). This rule does not apply to "'a legal conclusion couched as a factual allegation,'" Papasan v. Allain, 478 U.S. 265, 286 (1986) (quoted in Twombly, 550 U.S. at 555), nor to "allegations that contradict matters properly subject to judicial notice" or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A court's consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003).

III. APPLICATION

Plaintiff alleges wide-ranging damages, including lost sales, lost profits, recall- related administrative costs, and the loss of goodwill and reputation for the recalled brands. (FAC ¶ 163.) Plaintiff also alleges its buyers have demanded credit for the recalled eggs and for their incidental and consequential costs related to the recall, and demanded that certain brand names be retired due to the recall. (FAC ¶ 163.) Plaintiff further seeks compensatory damages because it "has suffered lost future business and sales from customers who have blamed NuCal for the disruption, loss of goodwill and food safety panic that resulted from the defendants' negligence and misconduct, or who have associated NuCal and NuCal's brands with the defendants' negligence and misconduct." (Id. ¶ 174.) The Hillandale defendants contend "[e]ach of NuCal's claims for damages on the basis of negligence involve [sic] pure economic loss damages under California law." (Mot. at 7-8, ECF 66.) Plaintiff concedes its economic losses "include the reduced value of the eggs recalled by Hillandale"; "the costs of shipping and disposing of the Hillandale recalled eggs"; and "the profits that were lost when the Hillandale eggs were recalled." (Opp'n at 9, ECF 96.)

However, plaintiff contends its losses were not limited to those arising from defendants' defective eggs; rather, its recall "necessarily included all eggs that NuCal processed on the dates when the defendants' SE-tainted eggs were in NuCal's processing plants." (Id.) Specifically, plaintiff alleges that its losses also included "the product cartons and other materials that NuCal used to package the defendants' SE-tainted eggs" and "[t]he destruction of eggs from other sources, as well as the destruction of packaging materials." (Id.) These ...


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