Southwest Pet Products v. Koch Industries

• Citation: 89 F.Supp.2d 1115
• Decision Date: 09 March 2000
• Docket Number: No. Civ.A. 95-2531PHXRGS.,Civ.A. 95-2531PHXRGS.
• Parties: SOUTHWEST PET PRODUCTS, INC., an Arizona Corporation, Earth Elements, Inc., f/d/b/a Nature's Recipe Pet Foods, Real Party in Interest, Plaintiffs, v. KOCH INDUSTRIES, INC., Koch Agriculture, Inc., Koch Agri-Services, Benson-Quinn Co., and Harvest States Cooperatives, Defendants.
• Court: U.S. District Court — District of Arizona

89 F.Supp.2d 1115

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

No. Civ.A. 95-2531PHXRGS.

United States District Court, D. Arizona.

March 9, 2000.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM AND ORDER

YOUNG, District Judge.¹

I. Introduction

The plaintiffs in this action, Southwest Pet Products, Inc. ("Southwest") and Earth Elements, Inc. ("Earth Elements"), allege that the various defendants sold them wheat infected with a toxin that was incorporated into pet food and eventually made several dogs ill. Southwest manufactured the pet food and sold it to Earth Elements, who packaged it for end users. Those two companies have settled with each other and now bring claims against the remaining members of the chain of distribution. All of the defendants have brought motions to dismiss, each on largely similar grounds. Though every dog may indeed have its day, for the reasons described herein, today is only very dimly the plaintiffs'.

II. Factual and Procedural Background

The following facts are based primarily on allegations in the Third Amended Complaint (the "Complaint"):

On or about April 7, 1995, Southwest, a manufacturer of dog food, contracted with Koch Agriculture, Inc. (together with related Koch companies, "Koch"), for the purchase of approximately 1400 tons of feed wheat. See Third Am.Compl. ¶ 19 (hereinafter "Compl."). The purchase agreement was confirmed in a written "sales confirmation" dated April 20, 1995. See id. ¶ 24. Koch purchased the wheat that it sold to Southwest from Benson-Quinn Co. ("Benson") and Harvest States Cooperatives ("Harvest"). In May of 1995, Southwest had samples of delivered wheat tested for vomitoxin by Wasatch Laboratories, Ltd. ("Wasatch"). See id. ¶ 64. The results showed "less than 1 ppb" of vomitoxin. See First Am.Compl. ¶ 23. Based upon this testing, Southwest included the wheat in dog food it manufactured for Earth Elements. See Compl. ¶ 65. Several customers reported that their pets either refused to eat the food or became sick after eating it. See id. ¶ 66.

Earth Elements recalled all of the dry dog food manufactured by Southwest between May 17, 1995 and July 20, 1995. See id. ¶ 69. Southwest cooperated with Earth Element's recall efforts by "devoting management time; by forbearing temporarily on collection of some amounts owed by Earth Elements; by continuing to supply Earth Elements with finished product; by reimbursing Earth Elements for some of its recall expenses; and by incurring other expenses related to the recall." Id. ¶ 74. Southwest alleges that tests of finished product samples, and retained samples of delivered wheat, indicated higher than acceptable levels of vomitoxin, see id. ¶ 68, and that the wheat did not conform to the sales contract between Southwest and Koch, see Compl. ¶¶ 11, 19, 24. Southwest further alleges that it contracted with Koch for "feed wheat," but that Benson and Harvest supplied Koch with "sample grade" wheat, while representing in their bills of lading and other "delivery documents" that the wheat and the rail cars contained "feed wheat." See id. ¶¶ 20, 24, 54, 88. In addition, Southwest and Earth Elements allege that "sample grade" wheat is unsuitable as an ingredient in pet food. See id. ¶ 61. Finally, Southwest alleges that Wasatch failed to exercise reasonable care or competence in its testing of the wheat. See id. ¶ 85.

On October 12, 1995, Earth Elements filed a complaint in the United States District Court for the Southern District of California (the "California Litigation"), naming Harvest, Benson, Koch, and Southwest as defendants. The complaint alleged negligence, negligence per se, negligent interference with prospective economic advantage, strict products liability, breach of implied warranties, and equitable indemnity. Not to be outdone, Southwest then marked its territory by filing a complaint in the United States District Court for the District of Arizona (the "Arizona Litigation"), naming Earth Elements, Koch, Benson, Harvest, and Wasatch as defendants.

In 1996, Southwest, Koch, Harvest, and Benson each filed separate motions in the California Litigation to dismiss all the claims asserted in Earth Element's complaint, with all parties arguing that liability from their business transactions should be limited to breach of contract claims only, pursuant to the economic loss rule.

On March 22, 1996, Earth Elements filed a motion to stay the Arizona Litigation, which was granted in the dog days of an Arizona summer, on August 19, 1996. In the California Litigation, on September 6, 1996 and December 26, 1996, Judge Timlin dismissed all of Earth Element's claims against Southwest, Koch, Harvest, and Benson, holding that the economic loss rule precluded recovery under any of Earth Element's four tort claims, that Earth Element's contractual claims against Harvest and Benson failed because of a lack of privity, and that the indemnity claim failed because Earth Elements had not pleaded that it suffered any loss.

Also on December 26, 1996, Southwest circulated a stipulation to transfer the Arizona Litigation to California. On May 30, 1997, Southwest filed a formal withdrawal of its opposition to Earth Elements' motion to transfer the Arizona Litigation to California. In November 1997, the Arizona Litigation was transferred to California.

Thereafter, on December 15, 1997, Earth Elements and Southwest entered into a settlement agreement. See Compl. ¶¶ 72-73. Southwest alleges that it paid Earth Elements total consideration of not less than $21,000,000 under the settlement agreement, including $1,000,000 in cash and the assignment of certain of Southwest's claims against the defendants in this lawsuit. See id. ¶ 73.

On February 3, 1999, the California court retransferred the Arizona Litigation to the District of Arizona. The instant motions were pending at the time of transfer.

III. Discussion

A. Motion to Dismiss Standard

A claim may be dismissed only if "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" United States v. Claiborne, 781 F.2d 1334, 1337 (9th Cir.1986) (quoting Sherman v. Yakahi, 549 F.2d 1287, 1290 [9th Cir.1977]).

B. Koch's Motion to Dismiss

Southwest brings a variety of claims against Koch: breach of contract (Count I), breach of express warranty (Count V), breach of the implied warranty of merchantability (Count XIII), and breach of the implied warranty of fitness (Count XIV) (collectively, the "Contract Claims"); intentional misrepresentation (Count II), negligent misrepresentation (Count III), concealment (Count IV), negligence (Count VI), strict products liability (Count X), negligent interference with a prospective economic advantage (Count XI), and intentional interference with a prospective economic advantage (Count XII) (collectively, the "Tort Claims"); and, finally, equitable indemnity (Count VIII) and implied contractual indemnity (Count IX) (together, the "Indemnity Claims"). With dogged persistence, Koch has moved to dismiss each of these claims.

1. The Contract Claims

Koch argues that each of the Contract Claims must fail because the written contract between Koch and Southwest expressly disclaims all implied warranties, limits recovery to replacement of the wheat or a refund of the difference between the contractual price and the fair market value, and excludes recovery of incidental and consequential damages. Specifically, Koch relies upon the written sales confirmation that was signed by both parties on April 20, 1995 (the "Confirmation"). See Koch Mem.Ex. B.² On the reverse side of the Confirmation, several pertinent provisions were included:

1. CONFIRMATION: This document contains a contract between Buyer and Seller. Unless objected to in writing within five days, the terms hereof shall be the contract.

6. WARRANTIES: Koch Agri Services has made no warranty to the Buyer except as appearing expressly within the written terms of this contract. The goods are sold AS IS. IMPLIED WARRANTIES OF MERCHANTABILITY AND IMPLIED WARRANTIES OF FITNESS ARE EXPRESSLY EXCLUDED.

7. DAMAGE LIMITATION: IN NO EVENT SHALL KOCH AGRI SERVICES BE LIABLE FOR INCIDENTAL

OR CONSEQUENTIAL DAMAGES. If the goods fail to meet the contract description in any particular, the Buyer shall give immediate notice to Koch Agri Services and submit samples for Federal Inspection. If the inspection establishes the goods failed to conform to the contract description, Koch Agri Services may at it's election either replace the goods with the conforming goods within a reasonable time, or pay to the Buyer the difference between the contract price and fair market value of the goods delivered. THE REMEDIES PROVIDED IN THIS PARAGRAPH ARE EXCLUSIVE.

9. AGREEMENT: This contract together within any written account agreement is the parties entire agreement, incorporating all of the parties prior negotiations. Any amendment or modification must be by a signed writing.

Id. Because Southwest has only alleged incidental and consequential losses in the Complaint, Koch argues that the Confirmation on its face precludes contractual recovery.

In response, Southwest raises an argument with an authoritative bark but no actual legal bite. Southwest claims that in the Complaint it defined the parties contractual agreement only to include the verbal agreement and the front side of the Confirmation. It specifically avoided including the reverse side of the Confirmation in the Complaint. Thus, Southwest argues that "[b]ecause the Court must accept all well-pleaded allegations as true, the contract as defined by [Southwest] must be the contract adopted by the Court for purposes of the motion to dismiss." Southwest Opp'n Mem. at 6...