Southwest Pet Products, Inc. v. Koch Industries

• Decision Date: 11 June 2003
• Docket Number: No. CIV.A. 95-02531-PHX-RGS (WGY).,CIV.A. 95-02531-PHX-RGS (WGY).
• Citation: 273 F.Supp.2d 1041
• Court: U.S. District Court — District of Arizona
• Parties: SOUTHWEST PET PRODUCTS, INC., Earth Elements Inc., f/d/b/a Nature's Recipe Pet Foods, Real Party In Interest<SMALL><SUP>1</SUP></SMALL>, Plaintiffs, v. KOCH INDUSTRIES, INC., Koch Agriculture, Inc., Koch Agri Services, Benson-Quinn Co., and Harvest States Cooperatives, Defendants.

273 F.Supp.2d 1041

SOUTHWEST PET PRODUCTS, INC., Earth Elements Inc., f/d/b/a Nature's Recipe Pet Foods, Real Party In Interest¹, Plaintiffs, v. KOCH INDUSTRIES, INC., Koch Agriculture, Inc., Koch Agri Services, Benson-Quinn Co., and Harvest States Cooperatives, Defendants.

No. CIV.A. 95-02531-PHX-RGS (WGY).

United States District Court, D. Arizona.

June 11, 2003.

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James A. Craft, Esq, Michael R. King, Esq, Gammage & Burnham PLC, Phoenix, AZ, L. Rachel Helyar, Akin, Gump, Strauss, Hauer & Feld LLP, Los Angeles, CA, Peter J. Mort, John W. Vineyard, David Thomas Bristow, Irena Leigh Norton, Akin, Gump, Strauss, Hauer & Feld LLP, Riverside, CA, Gary E. Cripe, Cripe & Graham, Upland, CA, for plaintiffs.

William R. Jones, Jr., Esq, James J. Osborne, Esq, David Conley Lewis, Esq, Carol Marie Romano, Jones, Skelton & Hochuli PLC, Phoenix, AZ, Richard J. Nygaard, Esq, Mark Allen Mitchell, James R. Crassweller, Rider, Bennett, Egan & Arundel LLP, Marc Andre Al, Lindquist & Vennum PLLP, Mineapolis, MN, for defendants.

MEMORANDUM

YOUNG, District Judge.²

I. INTRODUCTION

On March 3, 2003, the sole remaining defendant in this action, Benson-Quinn Company ("Benson"), moved for summary judgment on the only surviving claim of the plaintiff, Southwest Pet Products, Inc. ("Southwest") against it: that Benson should be held strictly liable for selling Southwest vomitoxin-infected wheat. The wheat in question was subsequently used to make pet food that eventually made dogs ill.

On April 16, 2003, this Court issued an order [Docket No. 522] granting Benson's motion for summary judgment [Docket No. 485]. The following memorandum explains the reasoning behind the Court's decision.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. Facts Regarding the Parties

Because Benson moved for summary judgment, the facts discussed below are presented in the light most favorable to Southwest and all reasonable inferences are drawn in Southwest's favor. Fed. R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Southwest is an Arizona corporation that manufactures dog food for Earth Elements, a California corporation. Pls.' Response to Def.'s Factual Stmt. ("Pls.' Response") [Docket No. 502] at ¶ 1. In April 1995, Southwest contracted with Koch Industries, Inc. ("Koch") to buy 1,400 tons of "feed wheat" to use in combination with other ingredients to make dog food and to be delivered between April and June 1995. Id. at ¶ 3. Koch, in turn, purchased the wheat in question from Benson. Id. at ¶ 4. After making the deal with Koch, Benson was directed to ship the wheat directly to Southwest in Tolleson, Arizona. Id. The bills of lading specifically identified the buyer as Southwest and described the product as "feed wheat" or "dark northern spring wheat." Exs. A-E to Decl. of Norton [Docket No. 493]. The United States grading certificates that were sent to Southwest, however, labeled the feed clearly as "sample grade northern spring wheat." Exs. 35A-H to Def.'s Corrected Stmt. of Facts [Docket No. 501].

Before using the wheat to make pet food, Southwest had some of it tested for vomitoxin by Wasatch Laboratories, Ltd. ("Wasatch"). Pls.' Response at ¶ 22. After the test results showed that less than 1 part per million ("ppm") of the wheat was tainted with vomitoxin, Southwest used the wheat to make dog food for Earth Elements. Id. Thereafter, several of Earth Elements' customers reported that their dogs refused to eat the dog food or became sick after eating it. Id. at ¶ 24.

Earth Elements recalled the dry dog food between May 17, 1995 and July 20, 1995, and Southwest cooperated with Earth Elements' efforts, resulting in labor and overhead costs to it.³ Id. at ¶ 25; Pls.' Notice of Mot. for Partial Summ. J. and Summ. Adjudication ("Pls.' Notice of Mot.") [Docket No. 490] at 3. In addition, Southwest had the leftover wheat samples tested for vomitoxin. These tests showed — in contrast to the previous results — that the wheat had levels of vomitoxin over 5 ppm, with some samples as high as 34.6 ppm. Pls.' Response at ¶ 18; see also Lottie Dep. (Ex. P to Norton Decl.) at 55.

Southwest also tested the suspect end-food product itself. The results of the test "show[ed] the levels of DON [vomitoxin] in the final products to vary, with levels of 2-5 ppm being reported most often in the suspect products, and up to levels of 9 ppm in the NR Lamb and Rice product, which seemed to be the product line most affected." Thompson Dep. (Ex. L. to Norton Decl.) at 42.

Based upon these test results, Southwest claims that the delivered wheat did not conform to the sales contract between Southwest and Koch because Southwest had contracted for feed wheat but received sample grade, and sample grade is not suitable for making pet food for dogs. Third Amended Complaint ("Compl.") [Docket No. 198] ¶ 61.

It is undisputed that the United States grain standards do not include a classification for, or definition of, feed wheat. Southwest contends, however, that feed wheat generally refers to raw wheat that is "intended for feeding." Wilson Expert Rep. (Ex. I to Norton Decl.) at 4.⁴ Southwest repeatedly states in its submissions that feed wheat means wheat suitable for use as feed for animals in general. See, e.g., Pls.' Response [Docket No. 502] ¶¶ 6, 18; Pls.' Separate Statement of Undisputed Facts ("Pl.'s Undisputed Facts") [Docket No. 491] at ¶ 5.⁵ The Court accepts this definition of feed wheat.

One of Southwest's experts further asserts that feed wheat "should still be subject to FDA advisory levels: otherwise it would be considered un-merchantable for its intended use." Wilson Expert Rep. (Ex. I to Norton Decl.) at 4 (emphasis added). This assertion, however, is not supported by any other testimony, and it is undisputed that the Food and Drug Administration ("FDA") advisory levels apply only to end-food product and not to raw wheat. Therefore, the Court disregards it.⁶

Southwest and Benson agree that the contract did not specify vomitoxin limits but only specified "no sour, musty, or smutty to apply." Pls.' Response at ¶ 7. Some of the expert testimony indicates that the wheat in question was sold at discounted rates relative to the cost of wheat that is subject to specific vomitoxin limits or described as "vomitoxin free." Christopher Dep. (Ex. O to Norton Decl.) at 51-53; Wilson Expert Rep. (Ex. I to Norton Decl.) at 9-11. It is unclear whether Koch alone received the benefit of the discounted rates or if some of that benefit was passed on to Southwest. Southwest has submitted expert testimony that shows that Benson's margin on the wheat was greater than normal, Wilson Expert Rep. (Ex. I to Norton Decl.) at 13, indicating that the discount on the wheat — if any — may have been lower than average.

B. Facts Regarding Vomitoxin and Wheat⁷

Vomitoxin (also known as deoxynilvalenol and referred to as DON) is a toxin that occurs naturally in wheat as a by-product of scab infestations. Id. at 4; see also Lottie Dep. (Ex. P to Norton Decl.) at 117. During 1993 and 1994, the growing conditions in the midwest gave rise to scab infestations, and vomitoxin became prevalent. Wilson Expert Rep. (Ex. I to Norton Decl.) at 2, 4. Vomitoxin does not pose a real threat to public health among the general population, but sometimes causes acute, temporary nausea and vomiting in animals and humans. Id. at 4. Younger animals and animals with preexisting conditions are more vulnerable to vomitoxin's effects. Thompson Dep. (Ex. A to Pls.' Response) at 53-54. Different animals have different tolerances for vomitoxin: cattle and poultry have the highest tolerance, whereas swine and other animals are more sensitive to it. Hart Expert Rep. (Ex. K to Norton Decl.) at ¶ 4. Among normal, healthy adult dogs, the reaction to vomitoxin is "usually mild and self-limiting and can be resolved by removing the food." Thompson Dep. (Ex. A to Pls.' Response) at 53.

Although the FDA previously regulated the raw supplier, in 1993 it switched course and began regulating only vomitoxin in the end-food product. Hart Expert Rep. (Ex. K to Norton Decl.) at ¶ 4. The FDA regulates vomitoxin by advising the appropriate vomitoxin level for end-food products rather than by setting absolute limits. Wilson Expert Rep. (Ex. I to Norton Decl.) at 5; see also Thompson Dep (Ex. L to Norton Decl.) at 44.⁸ The FDA's advisory limits for vomitoxin are 1 ppm for humans, 10 ppm for cattle and poultry, and 5 ppm for swine and all other animals. Hart Expert Rep. (Ex. K to Norton Decl.) at ¶ 4.⁹

The FDA, by creating advisory limits on the end-product, placed the onus of compliance on the food manufacturer instead of the supplier. Id. at ¶ 5 (referring to Scab of Wheat and Barley: A Re-emerging Disease of Devastating Impact, 81 Plant Disease 1340, which states that "[t]he change in the FDA levels of concern for vomitoxin in the fall of 1993 shifted the consequences of vomitoxin contamination from the buying point to the marketplace").¹⁰ Expert testimony introduced by Southwest in its own motion for summary judgment demonstrates that, although sellers commonly test the wheat themselves, the only entity with an obligation to test the wheat for vomitoxin is the buyer (in the absence of a contractually-set vomitoxin limit). Christopher Dep. (Ex. O to Norton Decl.) at 54-55; Lottie Dep. (Ex. P to Norton Decl.) at 122-23; Hart Expert Rep. (Ex. K to Norton Decl.) at 54-55.

Buying lower grade wheat increases the risk of having excessive vomitoxin in the wheat. Wilson Expert Rep. (Ex I to Norton Decl.) at 9; Hart Expert Rep. (Ex. K to Norton Decl.) at ¶ 6 ("Vomitoxin levels were associated with grain quality. Generally, the levels of vomitoxin were higher when the graded level of the wheat was lower."). The risk increases because the existence of vomitoxin is highly correlated with factors (such as damage, defects, and test...