Kaloti Enterprises, Inc. v. Kellogg Sales Co.

• Decision Date: 08 July 2005
• Docket Number: No. 2003AP1225.,2003AP1225.
• Citation: 2005 WI 111,699 N.W.2d 205,283 Wis.2d 555
• Parties: KALOTI ENTERPRISES, INC., Plaintiff-Appellant, v. KELLOGG SALES COMPANY and Geraci & Associates, Inc., Defendants-Respondents.
• Court: Wisconsin Supreme Court

283 Wis.2d 555

2005 WI 111

699 N.W.2d 205

KALOTI ENTERPRISES, INC., Plaintiff-Appellant, v. KELLOGG SALES COMPANY and Geraci & Associates, Inc., Defendants-Respondents.

No. 2003AP1225.

Supreme Court of Wisconsin.

Oral argument January 7, 2005.

Decided July 8, 2005.

For the plaintiff-appellant there were briefs by Michael P. Stupar, George S. Peek and Stupar, Schuster & Cooper, S.C., Milwaukee, and oral argument by George S. Peek.

For the defendant-respondent, Geraci & Associates, Inc., there was a brief by Scott W. Hansen, Laura A. Brenner, James J. Eichholz and Reinhart Boerner Van Deuren, S.C., Milwaukee, and oral argument by Jeremy P. Levinson.

For the defendant-respondent, Kellogg Sales Company, there was a brief by Brian R. Smigelski, Jeremy P. Levinson and Friebert, Finerty & St. John, S.C., Milwaukee, and oral argument by Jeremy P. Levinson.

An amicus curiae brief was filed by William C. Gleisner, III, and Law Offices of William C. Gleisner, III, Milwaukee, on behalf of the Wisconsin Academy of Trial Lawyers.

¶ 1. PATIENCE DRAKE ROGGENSACK, J.

On certification from the court of appeals, we review a decision of the circuit court for Waukesha County dismissing an amended complaint filed by petitioner, Kaloti Enterprises, Inc. (Kaloti), against respondents, Kellogg Sales Company (Kellogg) and Geraci & Associates, Inc. (Geraci), for failure to state a claim. The court of appeals certified two questions that can be summarized as follows: (1) whether a duty to disclose facts arises between sophisticated parties to a commercial transaction where the parties have an established practice of doing business and the facts are material to a change in that practice of doing business; (2) whether Kaloti's intentional misrepresentation claim is barred by the economic loss doctrine.

¶ 2. Based solely on Kaloti's allegations, we conclude that Kellogg and Geraci had a duty of disclosure that they failed to satisfy, thereby providing a basis for Kaloti's intentional misrepresentation claim, and that under these circumstances, Kaloti's intentional misrepresentation claim was not barred by the economic loss doctrine. Therefore, we reverse the circuit court's dismissal of Kaloti's amended complaint, and we remand for further proceedings.

I. BACKGROUND¹

¶ 3. Kellogg is a wholly owned subsidiary corporation of Kellogg Company, Inc. Kaloti is a wholesaler of food products. Over several years, Kellogg and Kaloti entered into numerous transactions through Geraci, Kellogg's agent. In each transaction, Geraci approached Kaloti to sell Kellogg products. Geraci negotiated all elements of the transaction for Kellogg, including product specifics, price, delivery schedule, allowances and terms of sale. Geraci accepted purchase orders from Kaloti and processed these orders, which were ultimately accepted by Kellogg. Following the negotiation of each contract, Kellogg "drop shipped" its product directly to Kaloti. Fleming-Marshfield, Inc. invoiced Kaloti and collected for Kellogg. Kaloti then sold Kellogg's products.

¶ 4. Kaloti alleges that, through a series of such transactions, a practice of doing business arose among Kaloti, Geraci and Kellogg, and that Geraci and Kellogg were aware that Kaloti bought Kellogg's products to resell them "as a `secondary supplier' to large market stores."

¶ 5. Kellogg Company, Inc. acquired Keebler Foods Company (Keebler). As a result of that acquisition, Kellogg changed how it marketed NutriGrain and Rice Krispie Treat products. Instead of marketing these products through distributors or wholesalers such as Kaloti, Kellogg decided to sell them directly to the same large market stores to which Kaloti sold Kellogg's products. Kaloti did not know of Kellogg's decision to begin direct sales.

¶ 6. On May 14, 2001, after Geraci knew that Kellogg had changed to a direct-sales mode of marketing, Geraci solicited an order from Kaloti. The order was a $124,000 "quarterly promotion order," for NutriGrain and Rice Krispie Treats. Because of their past dealings with Kaloti, Geraci and Kellogg knew that it would take Kaloti three months to resell this order. Kaloti intended to market this order as it had in prior instances, as a secondary supplier to large stores, and it relied on that market being open. Further, in soliciting and accepting Kaloti's order, Geraci and Kellogg knew that Kellogg's change in marketing scheme would deny Kaloti the market it had used in the past to resell Kellogg's products.

¶ 7. Kellogg delivered the order to Kaloti on June 1, 2001, and Kaloti paid for it.² On or about June 14, 2001, Kaloti's major and usual customers notified Kaloti that they would no longer purchase products from Kaloti because Kellogg was selling directly to them.

¶ 8. On June 15, 2001, Geraci representative Michael Angele told Kaloti employee Mary Beth Wel-house that Geraci had not advised Kaloti of Kellogg's anticipated change in marketing strategy because of a confidentiality agreement between Kellogg and Geraci in respect to Kellogg's new marketing strategy. The same day, Kaloti notified Geraci and Kellogg that it was rescinding the May 14, 2001 purchase, advising them that it would not have placed the order or accepted the product if it had known that Kellogg had changed to a direct-sales mode of marketing. Kaloti attempted to return the product, but Kellogg has refused to accept delivery and has refused to reimburse Kaloti.

¶ 9. Kaloti alleges that Geraci and Kellogg acted intentionally in concealing facts material to Kellogg's change in marketing strategy, which change caused Kaloti to be shut out of the market it had utilized in the past to resell Kellogg's products. Kaloti attempted to mitigate its damages and claims that, notwithstanding those efforts, it has lost $100,000 due to Kellogg's intentional misrepresentation.

II. DISCUSSION

A. Standard of Review

¶ 10. We review a dismissal for failure to state a claim as a question of law, without deference to the circuit court's decision. Tietsworth v. Harley-Davidson, Inc., 2004 WI 32, ¶ 11, 270 Wis. 2d 146, 677 N.W.2d 233; Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 245, 593 N.W.2d 445 (1999). In the present case, our inquiry begins with consideration of whether the amended complaint states an intentional misrepresentation claim, the determination of which turns on whether Geraci and Kellogg had a duty to disclose certain facts to Kaloti. Whether a duty exists is also a question of law that we review independently of the circuit court. See Ritchie v. Clappier, 109 Wis. 2d 399, 403, 326 N.W.2d 131 (Ct. App. 1982). And finally, the application of the economic loss doctrine to a set of facts presents another question of law for our independent review. Ins. Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139, ¶ 15, 276 Wis. 2d 361, 688 N.W.2d 462.

B. Failure to State a Claim

¶ 11. A motion to dismiss for failure to state a claim tests the legal sufficiency of the complaint to state a claim for which relief may be granted. Tietsworth, 270 Wis. 2d 146, ¶ 11. When testing the legal sufficiency of a claim, all facts alleged in the complaint, as well as all reasonable inferences from those facts, are accepted as true. Ollerman v. O'Rourke Co., 94 Wis. 2d 17, 24, 288 N.W.2d 95 (1980). Furthermore, pleadings are liberally construed. Id. The complaint need not state all the ultimate facts constituting the cause of action, but rather, the complaint should be dismissed as legally insufficient only if there are no conditions under which the plaintiff can recover. Id.

C. Intentional Misrepresentation

¶ 12. There are three categories of common law misrepresentation: intentional, negligent and strict liability misrepresentation. Tietsworth, 270 Wis. 2d 146, ¶ 12. Kaloti's claim is for intentional misrepresentation, sometimes referred to as fraudulent misrepresentation, Ramsden v. Farm Credit Services of North Central Wisconsin ACA, 223 Wis. 2d 704, 718 n.9, 590 N.W.2d 1 (Ct. App. 1998), or common-law fraud, see Tietsworth, 270 Wis. 2d 146, ¶ 51. To state a claim for intentional misrepresentation, the following allegations must be made:

(1) the defendant made a factual representation; (2) which was untrue; (3) the defendant either made the representation knowing it was untrue or made it recklessly without caring whether it was true or false; (4) the defendant made the representation with intent to defraud and to induce another to act upon it; and (5) the plaintiff believed the statement to be true and relied on it to his/her detriment.

Ramsden, 223 Wis. 2d at 718-19 (footnote omitted); accord Tietsworth, 270 Wis. 2d 146, ¶ 13. ¶ 13. An intentional misrepresentation claim may arise either from a "failure to disclose a material fact" or from a "statement of a material fact which is untrue." See Ramsden, 223 Wis. 2d at 713. Here, Kaloti's intentional misrepresentation claim is based on the failure to disclose a material fact. However, "[a] person in a business deal must be under a duty to disclose a material fact before he can be charged with a failure to disclose." Southard v. Occidental Life Ins. Co., 31 Wis. 2d 351, 359, 142 N.W.2d 844 (1966); accord Tietsworth, 270 Wis. 2d 146, ¶ 14 (citing Ollerman, 94 Wis. 2d at 26). When there is a duty to disclose a fact, the law has treated the failure to disclose that fact "`as equivalent to a representation of the nonexistence of the fact.'" Hennig v. Ahearn, 230 Wis. 2d 149, 165, 601 N.W.2d 14 (Ct. App. 1999) (quoting Ollerman, 94 Wis. 2d at 26).³

¶ 14. Whether Kellogg and Geraci had a duty to disclose is the only aspect of Kaloti's intentional misrepresentation claim that is at issue here. In particular, we are asked to determine whether Kellogg and Geraci had a duty to disclose a change in Kellogg's marketing strategy that largely closed the markets on which they knew Kaloti relied to sell Kellogg's products. ¶ 15. In Ollerman, we decided that a duty to disclose had arisen in the course...