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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 upon defendant Quality Egg's motion to dismiss seven of plaintiff NuCal's eight claims. (ECF 70.) This motion was decided without a hearing. For the following reasons, defendant's motion to dismiss is DENIED in part and GRANTED 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"). At all times relevant to this action, plaintiff purchased eggs from defendant through a commercial exchange called the "Egg Clearinghouse, Inc." ("ECI"). (Id. ¶79.) Plaintiff alleges that defendant became aware of a heightened risk of SE contamination at defendant's farms in early 2010. (Id. ¶ 6.) Plaintiff further alleges that defendant had actual knowledge, no later than March 2010, that many of its chicken houses were contaminated with SE, and that by June 2010, its hens also had tested positive for SE. (Id. ¶¶ 5, 7.) Plaintiff avers that despite this knowledge, defendant 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 defendant, through omissions and misrepresentations, failed to comply with these new rules; for example, defendant represented it would notify plaintiff of any SE positive environmental tests involving farms that produced eggs plaintiff purchased. (Id. ¶¶ 156-157.) Plaintiff alleges defendant acted upon defendant's knowledge of the SE positive tests only when the FDA stepped in. (Id. ¶ 15.) Defendant then tested eggs produced at its farms and discovered about 170 SE-infected eggs. (Id. ¶ 16.) Defendant finally instituted a recall in August 2010. (Id. ¶ 1.) Before, during and after the recall, defendant 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 against three defendants, Quality Egg LLC ("Quality Egg"), Wright County Egg, and Hillandale Farms, alleging seven causes of action. (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 - and alleges 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.

Defendant Quality Egg moves to dismiss all but claim VI. Defendant argues plaintiff's fraud and negligence claims, claims IV, V and VII, are barred by the economic loss rule. Defendant asserts claims I, II and III lack essential elements. Finally, defendant avers that counts IV and VIII fail because they do not state fraud causes of action with particularity. The court will address each argument in that order.

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

A. The Economic Loss Rule

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 ¶¶ 158, 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. (Id. ¶¶ 158, 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 defendant's negligence and misconduct, or who have associated NuCal and NuCal's brands with the defendant's negligence and misconduct." (Id. ¶ 174.)

Defendant contends plaintiff does not allege the recalled eggs caused any physical harm to individuals or property and is therefore barred by the economic loss rule. (Mot. at 6-8, ECF 70.) Plaintiff concedes its economic losses "include the reduced value of the eggs recalled by Quality Egg"; "the costs of shipping and disposing of the Quality Egg recalled eggs"; and "the profits that were lost when the Quality Egg eggs were recalled." (Opp'n at 10, ECF 97.)

However, plaintiff contends its losses were not limited to those arising from the 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," and many of these eggs had nothing to do with plaintiff's contractual relationship with defendants. (Id.) Specifically, plaintiff alleges that its losses also included "the product cartons and other materials that NuCal used to package the defendant's SE-tainted eggs" and "[t]he destruction of eggs from other sources, as well as the destruction of packaging materials." (Id.) These losses, plaintiff contends, constitute damages to other property that takes plaintiff's negligence claims outside the scope of the economic loss rule (Id.)

Defendant replies that most of this damage to other property is not pled in the first amended complaint. (Reply at 5-6, ECF 114.) Plaintiff did not allege which eggs were recalled, defendant contends, and did not specifically allege that any eggs were physically damaged (Id.) Defendants also argue they owed plaintiff no legal duty independent of the contract and that the parties did not have a "special relationship" such that the economic loss rule's other exceptions would apply. (Id. at 6-8.)

Generally, purely economic losses are not recoverable in tort. S.M. Wilson & Co. v. Smith Int'l, Inc., 587 F.2d 1363, 1376 (9th Cir. 1978); Seely v. White Motor Co., 63 Cal. 2d 9, 16-17 (Cal. 1965). Put simply, "the economic loss rule 'prevent[s] the law of contract and the law of tort from dissolving one into the other.'" Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th979, 988 (Cal. 2004) (quoting Rich Products Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 969 (E.D. Wis. 1999)). However, a plaintiff can recover in tort after a contract breach in three situations. First, when a "product defect causes damage to 'other property,' that is, property other than the product itself." Jimenez v. Superior Court, 29 Cal. 4th 473, 483 (Cal. 2002) (emphasis omitted). Second, when a defendant breaches a legal duty independent of the contract, irrespective of whether damages are economic. Robinson, 34 Cal. 4th at 989. Third, if a "special relationship" existed between the parties, a party can still recover when the economic loss rule would otherwise apply. J'aire Corp. v. Gregory, 24 Cal. 3d 799, 804 (Cal. 1979).

"Economic loss . . . has been defined as the diminution in value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold. 'Economic loss generally means pecuniary damage that occurs through loss of value or use of the goods sold or the cost of repair together with consequential lost profits when there has been no claim of personal injury or damage to other property.'" San Francisco Unified Sch. Dist. v. W.R. Grace & Co., 44 Cal. Rptr. 2d 305, 310 n.5 (Cal. Ct. App. 1995) (quoting MDU Res. Group v. W.R. Grace and Co., 14 F.3d 1274, 1279 (8th Cir. 1994) (original emphasis)).

1. Plaintiff's Negligence Claims (Claims V and VII)

The court finds the economic loss rule does not entirely bar plaintiff's negligence claims because plaintiff has sufficiently pled damage to "other property." In support of its contention that it suffered damage to other property, namely other eggs and materials unrelated to the Quality Egg contract, plaintiff cites to two paragraphs in the First Amended Complaint:

In accordance with usual practice in the industry, NuCal sold the eggs it purchased from "Wright County Egg" and Hillandale together with eggs from other sources. NuCal sold and ...


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