G & H SOYBEAN OIL v. Diamond Crystal Sp. Foods

• Decision Date: 10 August 1992
• Docket Number: Civ. No. 4-91-CV-10393.
• Citation: 796 F. Supp. 1214
• Parties: G & H SOYBEAN OIL, INC. and Marc Heiden, Individually, Plaintiffs, v. DIAMOND CRYSTAL SPECIALTY FOODS, INC., Defendant.
• Court: U.S. District Court — Southern District of Iowa

796 F. Supp. 1214

G & H SOYBEAN OIL, INC. and Marc Heiden, Individually, Plaintiffs, v. DIAMOND CRYSTAL SPECIALTY FOODS, INC., Defendant.

Civ. No. 4-91-CV-10393.

United States District Court, S.D. Iowa, C.D.

August 10, 1992.

George A. LaMarca, Joel H. Dorman, LaMarca & Landry, P.C., West Des Moines, Iowa, for plaintiffs.

Randall H. Stefani, H. Richard Smith, Ahlers, Cooney, Dorweiler, Haynie Smith & Allbee, P.C., Des Moines, Iowa, for defendant.

ORDER

LONGSTAFF, District Judge.

Plaintiffs, G & H Soybean Oil, Inc. ("G & H"), and Marc Heiden, brought this action for damages against Defendant seeking to recover for breach of contract. Defendant has moved for partial summary judgment, and Plaintiffs have resisted the motion. Oral argument was heard by the court August 6, 1992.

I. BACKGROUND

Plaintiff G & H Soybean Oil, Inc., ("G & H") was formed April 1, 1990, (it incorporated in August, 1990) to process and market soybean cooking oil under the trade name, "Homestead Farms." Plaintiff Marc Heiden is Vice President and a principal shareholder of G & H.

According to its business plan, G & H did not intend to produce oil itself. Rather, it intended to bottle "Archer S," an oil produced by Archer Daniels Midland Company ("ADM"), under the Homestead Farms label. On May 21, 1990, Defendant, Diamond Crystal Specialty Foods, Inc. ("Diamond"), orally agreed with G & H to bottle, label, and package the Homestead Farms oil.

Between August and December, 1990, G & H officials made several preliminary marketing attempts, touting the product as the only soybean cooking oil produced and bottled in Iowa. In addition, several newspapers and trade publications reported that G & H would be purchasing its oil from ADM.

In early December, 1990, G & H notified Diamond that an initial bottling run of approximately 77 cases should be completed by early January, 1991. Instead of bottling the Archer S oil, however, Defendants allegedly used an inferior oil produced by Cargill, Inc. These bottles were then distributed directly to members of the Iowa Soybean Association as part of a promotional campaign. In addition, on January 23, 1991, Defendant notified G & H that, effective immediately, it would no longer bottle the Homestead Farms product.

Plaintiff G & H seeks damages for breach of contract, constructive fraud, fraud at law, fraudulent misrepresentation and negligent misrepresentation. Plaintiff Marc Heiden also seeks damages for constructive fraud, fraud at law, fraudulent misrepresentation and negligent misrepresentation.

Defendant has moved for partial summary judgment, claiming that damages should not be awarded to G & H based on lost profits, damage to business reputation, damage to trade name, or negligent misrepresentation. Moreover, Defendant moves for summary judgment on all claims of Marc Heiden, on the basis that he has not alleged injuries which are separate and distinct from those of the corporation.

II. APPLICABLE LAW

Summary judgment is properly granted when there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). The moving party must establish its right to judgment with such clarity there is no room for controversy. Jewson v. Mayo Clinic, 691 F.2d 405, 408 (8th Cir.1982).

The resisting party must set forth specific facts showing there is a genuine issue for trial and may not rely solely on legal conclusions to prove there is a genuine issue of material fact justifying denial of summary judgment. Fed.R.Civ.P. 56(e). However, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (emphasis in original).

In deciding whether to grant a motion for summary judgment, the district court must view the evidence in favor of the party opposing the motion and give that party the benefit of all reasonable inferences. Kegel v. Runnels, 793 F.2d 924, 926 (8th Cir.1986).

A. Damages from Lost Profits

Iowa recognizes the "new business rule," under which potential profits from an unestablished business generally are considered too speculative to serve as a basis for a damages award. Lakota Girl Scout Council, Inc. v. Harvey Fund-Raising Management, Inc., 519 F.2d 634, 640 (8th Cir.1975); Harsha v. State Savings Bank, 346 N.W.2d 791, 797 (Iowa 1984). This rule is not absolute. The basic question is "`whether a prospective loss of net profits has been shown with reasonable certainty.'" Harsha v. State Savings Bank, 346 N.W.2d at 798 (quoting Standard Machinery Co. v. Duncan Shaw Corp., 208 F.2d 61, 64 (1st Cir.1953)).

Harsha does not, as suggested by Defendant, set forth specific elements which must be established before considering evidence of lost profits. See Defendant's Memorandum of Authorities in Support of Motion for Partial Summary Judgment at 3. In reality, the "elements" listed by Defendant as controlling are case-specific facts cited by the court as supportive of its decision. Harsha v. State Savings Bank, 346 N.W.2d at 798-799. The key test arising from Harsha is whether lost profits can be shown with "reasonable certainty." Id. at 798.

Professor Dolich, the expert witness obtained by Plaintiff, appears to be qualified to provide opinion testimony as to lost profits. In addition, the fact Plaintiffs' data stems largely from their own business plan does not in and of itself discredit the data. The Iowa Court of Appeal's decision in Connolly v. Bain, 484 N.W.2d 207 (Iowa Ct.App.1992) can be distinguished on this issue. First, the multi-million dollar profit projections in Connolly were clearly excessive in light of the fact the company sold only one policy. Id. at 210. G & H's business plan in the present case is far more conservative. In addition, unlike the business in Connolly, G & H has proven its viability by selling "thousands" of bottles of oil (according to Plaintiffs' counsel).

Perhaps more importantly, the Connolly court was reviewing a decision already made by the factfinder — not ruling on a preliminary motion as a matter of law. The jury must determine the credibility of Plaintiffs' data. See also Upjohn v. Rachelle Laboratories, Inc., 661 F.2d 1105, 1114 (11th Cir.1981) (flaws in plaintiff's projections go to weight, not sufficiency, of evidence).

It is therefore inappropriate to rule as a matter of law that Plaintiffs cannot prove lost profits to a reasonable certainty. If the issue of lost profits is submitted to a jury, however, any award will be closely scrutinized.¹

B. Damage to Business Reputation and Trade Name

Defendant next seeks to preclude damages based on injury to G & H's business reputation and trade name. As noted by Defendant, damage to both business reputation and trade name can be equated with damage to goodwill. See Superwood Corp. v. Larson-Stang, Inc., 311 F.2d 735, 742 (8th Cir.1963); 38 Am.Jur.2d Good Will § 6 (1968).

Neither the Eighth Circuit nor the Iowa Supreme Court has determined whether damage to goodwill can be awarded to a new business. Due to the early date, the court also is reluctant to use the 1935 Virginia case cited by Defendants as a basis for its decision. See Sinclair Refining Co. v. Hamilton & Dotson, 164 Va. 203, 178 S.E. 777, 782 (1935) (a new business has not established goodwill or reputation sufficient to merit damages specifically for loss to goodwill).

In its Reply Brief, Defendant correctly states that damages to the reputations of Gerleman and Heiden are irrelevant to the issue of damage to G & H's reputation or the Harvest Farms tradename. However, the court is not convinced the ten months of marketing conducted by Plaintiffs prior to the alleged breach failed to develop any goodwill. Clearly, G & H had already made significant progress with its largest potential client base — members of the Iowa Soybean Association. The issue, therefore, is not whether G & H had established a reputation prior to the breach, but whether it can prove damages to this reputation sufficient to warrant recovery.

Several courts have noted that business reputation and goodwill are tied closely with the production of profits. See e.g. Roundhouse v. Owens-Illinois, Inc., 604 F.2d 990, 995 (6th Cir.1979); Agr. Services Ass'n, In. v. Ferry-Morse Seed Co., 551 F.2d 1057, 1071 (6th Cir.1977). It is reasonable, therefore, that any claim for loss to goodwill for a new business must be proven according to the "reasonable certainty" test established in Harsha. Harsha v. State Savings Bank, 346 N.W.2d at 798. This holding is consistent with courts allowing claims for loss to goodwill in general, which have required specific proof as to loss in value. Roundhouse v. Owens-Illinois, Inc., 604 F.2d at 995 (without specific data, jury's assignment of damages for goodwill would have been "sheer speculation"); Westric Battery Co. v. Standard Electric Co., Inc., 522 F.2d 986, 988 (10th Cir.1975).

The court thus declines to grant summary judgment on this issue. However, damages on this issue must be shown with a "reasonable certainty," and, if awarded, will also be subjected to close scrutiny.

C. Negligent Misrepresentation

In Meier v. Alfa-Laval, Inc., 454 N.W.2d 576, 581, (Iowa 1990), the Iowa Supreme Court stated: "we believe that the duty recognized under the tort of negligent misrepresentation is generally not applicable to a retailer in the business of selling and servicing his merchandise." Rather, when the parties are involved in a commercial, arms-length transaction, "the law of contract and warranty may provide the more appropriate remedies for misstatements made during the sale and servicing of a product." Id. Only those businesses supplying information, rather than selling and servicing merchandise, are subject to the tort of...