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Imagenetix, Inc. v. Frutarom USA, Inc.

United States District Court, S.D. California

March 22, 2017

IMAGENETIX, INC., Plaintiff,
v.
FRUTAROM USA, INC., Defendant.

          ORDER DENYING PLAINTIFF'S SUPPLEMENTAL MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION TO STRIKE [DKT. NOS. 80, 82.]

          HON. GONZALO P. CURIEL United States District Judge.

         Plaintiff moves for partial summary judgment on the claim of breach of express warranty which is fully briefed. (Dkt. Nos. 80, 89, 98.) In its opposition to Plaintiff's motion, Defendant filed a motion to strike a portion of the declaration of Lowell Giffhorn, which is also fully briefed. (Dkt. Nos. 82, 95, 99.) Based on the reasons below, the Court DENIES Plaintiff's supplemental motion for summary judgment and DENIES Defendant's motion to strike.

         Procedural Background

         On November 21, 2012, Plaintiff Imagenetix, Inc. (“Imagenetix” or “Plaintiff”) filed a complaint against Defendant Frutarom USA, Inc. (“Frutarom” or “Defendant”) for breach of contract of the parties' Supply and Marketing Agreement (“Agreement”) and related state law claim. An answer was filed on March 8, 2013 along with a Counterclaim against Plaintiff for breach of contract. (Dkt. No. 15.) Plaintiff alleges that Defendant, when it supplied Plaintiff with BLIS K12™ (“BLIS K12"), a probiotic used in the mouth and throat, breached the express warranty concerning the legality of BLIS K12.

         On December 9, 2013, the Court denied Plaintiff's motion for partial summary judgment on its claim that Defendant breached the express warranty, granted in part and denied in part Defendant's motion for summary judgment and stayed the case to allow Plaintiff to submit a Citizen's Petition with the Federal and Drug Administration (“FDA”) to determine whether BLIS K12™ (“BLIS K12") was a drug, dietary supplement, old dietary ingredient (“ODI”) or a new dietary ingredient (“NDI”). (Dkt. No. 56.)

         Pursuant to the Court's order, on January 31, 2014, Plaintiff submitted a Citizen's Petition with the FDA. (Dkt. No. 66-1.) On May 1, 2014, Defendant submitted a response. (Dkt. No. 66-2.) In September 2016, FDA issued an opinion letter and found, at the time the marketing claims were made, BLIS K12 was a drug under section 201(g)(1)(B) of the Food, Drug, and Cosmetic Act (“FDCA”) and not a dietary ingredient. (Dkt. No. 80-30, P's NOL, Ex. 26.) If a product is a “drug” as classified by the FDA, certain statutory and regulation requirements must be met. (Id. at 5.)

         On September 19, 2016, after notification of the FDA's determination, the Court lifted the stay. (Dkt. No. 68.) After a telephonic status conference and discussing the prosecution of the case, the Court set a briefing schedule to allow Plaintiff to file a supplemental motion for summary judgment based on the recent FDA's determination. (Dkt. Nos. 70, 75.) On February 10, 2017, Plaintiff filed a supplemental motion for partial summary judgment solely on the breach of express warranty claim. (Dkt. No. 80.) On March 3, 2017, Defendant filed its motion to strike a portion of the declaration of Lowell Griffhorn. (Dkt. No. 82). Both motions have been fully briefed.

         Factual Background

         Imagenetix is a “nutritional supplement manufacturing company primarily engaged in developing, formulating and marketing over-the-counter, natural-based nutritional supplements and skin care products.” (Dkt. No. 80-22, P's NOL, Ex. 18, Spencer Decl. ¶ 1.) Frutarom is a “global company that manufactures, distributes, and markets flavors, fragrances, and ingredients to customers in the food, beverage, pharmaceutical, nutraceutical, and cosmetic industries.” (Dkt. No. 1, Comp. ¶ 3.)

         BLIS Technologies Ltd. (“BLIS”), a New Zealand company, created BLIS K12, a product from the naturally occurring bacterium Streptococcus salivarius (“S. Salivarius”). (Dkt. No. 89-2, D's Response to P's Separate Statement of Undisputed Material Fact (“SSUF”), No. 1.) BLIS K12 is an advanced oral probiotic developed for the mouth and throat. (Dkt. No. 80-6, P's NOL, Ex. 2 at 3[1].)

         BLIS and Frutarom Ltd., the parent company of Defendant Frutarom USA, entered into a Distribution and Marketing Agreement effective October 20, 2008, where Frutarom Ltd. agreed to distribute BLIS K12 in the United States. (Dkt. No. 80-25, P's NOL, Ex. 21.) In 2008, BLIS sought to partner with an international company that was “able to assist with regulatory access” to the United States market. (Dkt. No. 89-2, D's Response to P's SSUF No. 11.) In the Distribution and Marketing Agreement, Frutarom Ltd. warranted that it “shall satisfy any legal and regulatory compliance requirements needed . . . in order to promote, market, distribute and sell [BLIS K12].” (Dkt. No. 80-25, P's NOL, Ex. 21 at ¶ 7.3.)

         Plaintiff and Defendant subsequently entered into a Supply and Marketing Agreement (“Agreement”), effective September 1, 2009. (Dkt. No. 80-25, P's NOL, Ex. 1.) In the Agreement, Frutarom agreed to supply Imagenetix with BLIS K12, which Imagenetix incorporated into its product, BioGuard, a chewable tablet product. (Id.; Dkt. No. 80-22, P's NOL, Ex. 18, Spencer Decl. ¶¶ 4, 5.)

         Specifically, Frutarom “agreed to grant Imagenetix the exclusive right, within the Territory, to use [BLIS K12] as an ingredient in the Products for distribution purposes as a dietary supplement in a form of a lozenges and/or chewable tablets . . . .” (Dkt. No. 80-25, P's NOL, Ex. 1 at Recital C.) The Agreement provided that Defendant expressly warranted that BLIS K12 “shall conform to all applicable Federal, State and local rules, regulations and rules and will be fit for human consumption in the Product.” (Id. ¶ 8(b).) The Early Termination provision states that the “Agreement may be terminated upon ninety (90) days' written notice in the following events: . . . Either party fails to perform any obligation under this Agreement and fails to cure said default after ninety (90) days' written notice from the other specifically identifying the defaulted performance.” (Id. ¶ 15(c).) In addition, the “Agreement may be amended only by a writing signed by the parties which states that it is intended to amend this Agreement.” (Id. ¶ 17(b).)

         On March 6, 2009, prior to entering into the Agreement, Defendant provided Plaintiff with sales and marketing brochures such as “Frutarom USA, Inc., BLIS K12 A New Generation of Advanced Probiotics, Protecting the Gateway to the Body's Health”, (Dkt. No. 80-6, P's NOL, Ex. 2); “Frutarom USA, Inc., BLIS K12 Advanced Oral Cavity Probiotic that Protects the Gateway to the Body's Health”, (Dkt. No. 80-7, P's NOL, Ex. 3); and “BLIS Technologies Ltd., BLIS K12 Technical Information.” (Dkt. No. 80-8, P's NOL, Ex. 4.) The New Generation of Advanced Probiotics brochure and BLIS K12 Technical Information represented that BLIS K12 is compliant with U.S. regulations. For example, the New Generation of Advanced Probiotics brochure states that BLIS K12 “is deemed to be compliant with the USA's regulations DHSEA [Dietary Supplement Health and Education Act of 1994] as S. Salivarius is listed in the FDA listing of dietary ingredients in use before October 15th 1994 and has been the subject of safety studies without significant adverse reports.” (Dkt. No. 80-6, P's NOL, Ex. 2 at 4.) The BLIS K12 Technical Information states, “Streptococcus salivarius is a [sic] listed as an ingredient in use in the U.S. before 1994 by the National Nutritional Foods Association (now NPA) as documented on the FDA website.” (Dkt. No. 80-8, P's NOL, Ex. 4 at 4.)

         On September 18, 2008, prior to the effective date of the Distribution and Marking Agreement between BLIS and Defendant's parent company, the FDA placed a shipment of product containing BLIS K12 called Travel Guard on hold pending FDA review. (Dkt. No. 80-15, P's NOL, Ex. 11.) On September 25, 2008, the FDA formally detained the shipment of Travel Guard because “the article appears to be a new drug without an approved drug application. Product has medical claims for [which] an NDA number is required.” (Id. at 4-5.) On October 16, 2008, the FDA noted receipt of correspondence and commented that the product “will be refused next week. It makes medical claims.” (Id. at 6.) Finally, on October 22, 2008, BLIS K12 Travel Guard was refused admission because it “appears to be a new drug without an approved new drug application. You have not solved the problem. Product is not in compliance.” (Id. at 8-9.) Frutarom did not have knowledge of the 2008 regulatory issues with the FDA until after the filing of the instant complaint. (Dkt. No. 90-2, D's NOL, Ex. G, Katz Depo. at 42:2-10.)

         After BioGuard was launched, in early February 2011, a consumer, Ed Seafeldt, who bought the product at Costco, complained that his wife became seriously ill after taking BioGuard. (Dkt. No. 80-22, P's NOL, Ex. 18, Spencer Decl. ¶ 6; Dkt. No. 101-3, D's NOL, Ex. I (UNDER SEAL).) Mr. Seafeldt notified Costco and Imagenetix. (Dkt. No. 98-3, P's Reply NOL, Ex. 31, Spencer Depo. at 29:7-10.) The consumer raised safety concerns about BLIS K12 and filed an adverse event report with the FDA. (Dkt. No. 80-22, P's NOL, Ex. 18, Spencer Decl. ¶ 6.) The consumer also notified Plaintiff that the FDA had barred import of a BLIS K12 product in 2008. (Id.) After the Plaintiff learned about the incident, it contacted its insurance company and filed an adverse report with the FDA. (Dkt. No. 98-3, P's Reply NOL, Ex. 31, Spencer Depo. at 29:1-16; Dkt. No. 103-5, P's Reply NOL, Ex. 43, Spencer Depo. at 25:20-23 (UNDER SEAL).) It also communicated with Frutarom, and let them know about the complaint. (Dkt. No. 98-3, P's Reply NOL, Ex. 31, Spencer Depo. at 29:18-20.)

         During this investigation, Plaintiff learned that the FDA had not approved a New Drug Application (“NDA”) for BLIS K12 and that a New Dietary Ingredient (“NDI”) pre-market notification had not been filed for BLIS K12. (Dkt. No. 80-22, P's NOL, Ex. 18, Spencer Decl. ¶ 8.) After investigating BLIS K12, Plaintiff stopped selling BioGuard. (Id. ¶ 7.) Around April 2011, Plaintiff stopped purchasing BLIS K12 from Defendant. (Dkt. No. 80-29, P's NOL, Ex. 25, Spencer Depo. at 39:21-14.)

         Although the Agreement extended through 2011, “the parties agreed to part ways in April 2011. (Dkt. No. 49-1, P's Response to D's SSUF No. 4; see also Dkt. No. 90-3, D's NOL, Ex. J, Friedman Decl. ¶ 2 (the parties “mutually agreed to forego any claims under the original [Agreement] and part ways.”) In April 2011, Frutarom agreed to accept the return of 44, 000 kg of BLIS K12 from Imagenetix at 80% of the original invoice price less a 20% restocking fee. (Dkt. No. 90-8, D's NOL, Exs. AZ; BC.) In other words, Frutarom agreed to accept the return of over $500, 000 of BLIS K12 and credit Plaintiff for the return. (Dkt. No. 90-3, D's NOL, Ex. J, Friedman Decl. ¶ 2; Dkt. No. 98-3, P's Reply NOL, Ex. 31, Spencer Depo. at 67:11-21; 7:7-18.) There remained a balance due for product not accepted for return and Plaintiff agreed to a payment plan and only made two payments. (Dkt. No. 90-3, D's NOL, Ex. J, Friedman Decl. ¶ 2.) After several requests for the amounts due, Defendant sent the account to collection in July 2012. (Id.) Imagenetix also destroyed $314, 273 of BioGuard inventory. (Dkt. No. 98-9, P's Reply NOL, Ex. 41, Giffhorn Decl. ¶ 2.) While Imagenetix continued to sell BioGuard through at least December 2011. (Dkt. No. 101-1 at 30, D's NOL, Ex. D, Giffhorn Depo. at 80:7-12 (UNDER SEAL)), sales were de minimus. (Dkt. No. 103-4, P's Reply NOL, Ex. 42 at 2 (UNDER SEAL).)

         On August 1, 2012, Plaintiff sent a letter to Defendant stating that it breached the Agreement because BLIS K12 did not comply with federal law and demanded $1, 153, 570.76 or it would seek litigation. (Dkt. No. 80-34, P's NOL, Ex. 30.) The letter also noted that Frutarom's attempt to seek unwarranted payments for product which was misrepresented to Imagenetix was unconscionable. (Id. at 2.) When Frutarom did not cure the breach, Plaintiff filed the instant complaint on November 21, 2012. (Dkt. No. 1, Compl.)

         Although not specified as to when, BLIS Technologies disclosed to Imagenetix a report it commissioned, in April 2004, entitled “Report on the significance of human infections with Streptococcus salivarius”, in which the author concluded that S Salivarius “has the potential to cause human disease and even death, this occurs very rarely and almost exclusively in patients with underlying immunocompromise, or when the organism is inoculated directly into a sterile site.” (Dkt. No. 80-28, P's NOL, Ex. 24 at 10.)

         In September 2016, the FDA issued an opinion letter and found, at the time the marketing claims were made, BLIS K12 was a drug under section 201(g)(1)(B) of the FDCA and not a dietary ingredient. (Dkt. No. 80-30, P's NOL, Ex. 26.) In a footnote, the FDA specifically stated that it does not express an opinion whether BLIS K12 was a drug at any other point in time. (Id. at 5 n.7.) In coming to its conclusion, the FDA explained that at the time the claims were made BLIS K12 was a drug because “it was intended for use in the cure, mitigation, treatment, or prevention of disease” and not “a vitamin; mineral; herb or other botanical; amino acid; dietary substance for use by man to supplement the diet by increasing the total dietary intake; or a concentrate, metabolite, constituent, extract or combination of any ingredient from the preceding categories.” (Id. at 5, 7.)

         Since BLIS K12 was a drug under section 201(g)(1)(B) of the FDCA, 21 U.S.C. § 321(g)(1)(B), at the time the claims were made, “it was subject to the statutory and regulatory requirements pertaining to human drug products.” (Id. at 5.) “Failure to comply with such requirements would have rendered BLIS K12 adulterated or misbranded, and distribution of an adulterated or misbranded drug is a violation of section 301(a) of the FDCA.” But the FDA noted it was not making a determination whether BLIS K12 was in compliance with these requirements. (Id. at 6 n.9.)

         Discussion

         In its motion, Plaintiff seeks partial summary judgment solely on the issue of whether Defendant breached its express warranty in the Agreement that BLIS K12 would conform to all applicable laws since it failed to comply with the regulatory requirements for a drug. Defendant responds that there are triable issues of fact as to whether Defendant breached an express warranty, whether Plaintiff was harmed and whether Defendant's alleged breach caused Plaintiff's harm, and whether Plaintiff notified Defendant of the alleged breach. Defendant also contends there are material issue of fact as to the affirmative defense of notice and cure, and whether the parties modified or terminated the Agreement.

         A. Legal Standard for Motion for Summary Judgment

         Federal Rule (“Rule”) of Civil Procedure 56 empowers the Court to enter summary judgment on factually unsupported claims or defenses, and thereby “secure the just, speedy and inexpensive determination of every action.” Celotex Corp. v. Catrett, 477 U.S. 317, 325, 327 (1986). Summary judgment is appropriate if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). A fact is material when it affects the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. Celotex Corp., 477 U.S. at 323. The moving party can satisfy this burden by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element of his or her claim on which that party will bear the burden of proof at trial. Id. at 322-23. If the moving party fails to bear the initial burden, summary judgment must be denied and the court need not consider the nonmoving party's evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159-60 (1970).

         Once the moving party has satisfied this burden, the nonmoving party cannot rest on the mere allegations or denials of his pleading, but must “go beyond the pleadings and by her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file' designate ‘specific facts showing that there is a genuine issue for trial.'” Celotex, 477 U.S. at 324. If the non-moving party fails to make a sufficient showing of an element of its case, the moving party is entitled to judgment as a matter of law. Id. at 325. “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In making this determination, the court must “view[] the evidence in the light most favorable to the nonmoving party.” Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir. 2001). The Court does not engage in credibility determinations, weighing of evidence, or drawing of legitimate inferences from the facts; these functions are for the trier of fact. Anderson, 477 U.S. at 255.

         When a plaintiff moves for summary judgment, a plaintiff must “demonstrate affirmatively (by admissible evidence) that there is no genuine dispute of material fact as to each element of its claim for relief, entitling it to judgment as a matter of law” and “demonstrate the lack of any genuine dispute of material fact as to affirmative defenses asserted by the defendant. But here, plaintiff need not provide any evidence. It may simply point out the absence of evidence from the defendant.” O'Connell, et al., Federal Civil Procedure Before Trial, Calif & 9th Cir. eds., § 14:139 (2017).

         B. Plaintiff's Request for Leave to File an Amended Complaint

         In its opposition, Defendant, for the first time, argues that summary judgment should be denied because Plaintiff did not allege a claim for breach of express warranty in its complaint and no such claim can be alleged as the deadline for amendments have passed. Plaintiff does not dispute that the complaint does not allege a breach of express warranty claim but replies that Defendant has been on notice since at least July 2013 when it filed its motion for partial summary judgment raising the same claim and Defendant did not argue the breach of express warranty claim was not viable. Therefore, Defendant should be estopped from raising the argument, nearly four ...


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