Maxwell Foods, LLC v. Smithfield Foods, Inc.

2023 NCBC 11

• Court: North Carolina Business Court
• Decided: February 3, 2023
• Docket: 20-CVS-1430
• Status: Published

Opinion

Maxwell Foods, LLC v. Smithfield Foods, Inc., 2023 NCBC 11.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION WAYNE COUNTY 20 CVS 1430

MAXWELL FOODS, LLC,

Plaintiff, ORDER AND OPINION ON v. DEFENDANT’S PARTIAL MOTION TO DISMISS SMITHFIELD FOODS, INC.,

Defendant.

1. Smithfield Foods, Inc. has moved to dismiss certain claims that were newly

asserted in Maxwell Foods, LLC’s second amended complaint. For the following

reasons, the Court GRANTS in part and DENIES in part the motion.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by Reid L. Phillips, Charles E. Coble, Eric M. David, and Amanda S. Hawkins, for Plaintiff Maxwell Foods, LLC.

Robinson, Bradshaw & Hinson, P.A., by Robert E. Harrington, Ethan R. White, Mark A. Hiller, and Emma W. Perry, for Defendant Smithfield Foods, Inc.

Conrad, Judge.

I. BACKGROUND

2. The Court does not make findings of fact on a motion to dismiss. The

following background assumes that the second amended complaint’s allegations are

true.

3. Smithfield is the world’s largest pork producer. Since 1994, Maxwell has

supplied swine to Smithfield under an output contract entitled Production Sales

Agreement, or PSA for short. A related letter agreement includes a

most-favored-nation clause, in which Smithfield represented that it had given Maxwell “the same economic incentives” as its “other major swine suppliers” and

promised to offer Maxwell “the benefit of future changes in economic benefits given

said major swine suppliers” during the PSA’s term. (See 2d Am. Compl. ¶¶ 10, 18,

22, 33, Ex. 1, Ex. 2, ECF No. 97.)

4. This longstanding relationship is now at an end. In this case, Maxwell

claims that it is going out of business due to Smithfield’s wrongdoing. The original

complaint included claims for breach of the most-favored-nation clause, breach of the

PSA’s output requirement, and breach of a supposed duty to renegotiate the PSA’s

pricing formula. An amendment then added a claim under N.C.G.S. § 75-1.1. In an

earlier opinion, the Court dismissed the claim for breach of the duty to renegotiate

and the section 75-1.1 claim but allowed the others to proceed. See generally Maxwell

Foods, Inc. v. Smithfield Foods, Inc., 2021 NCBC LEXIS 71 (N.C. Super. Ct. Aug. 26,

2021).

5. With Smithfield’s consent and the Court’s permission, Maxwell has since

amended its complaint for a second time based on information obtained in discovery.

The second amended complaint adds new claims for fraudulent concealment and

breach of the PSA’s price term. These additions are the focus of the present dispute.

6. The fraud claim relates to the most-favored-nation clause. As early as 2011,

Smithfield allegedly breached the clause by offering better economic benefits to some

swine suppliers, excluding Maxwell. According to Maxwell, Smithfield had a duty to

disclose these offers but concealed them instead. Maxwell alleges that, but for the

concealment, it would have acted to enforce its contractual rights sooner and might have avoided having to go out of business. In addition to seeking compensatory and

punitive damages, Maxwell contends that Smithfield should be estopped from

asserting the statute of limitations as a defense to any breach that was concealed.

(See, e.g., 2d Am. Compl. ¶¶ 60–62, 67–71, 78, 119–21, 157–69.)

7. The claim for breach of the PSA’s price term rests on allegations that

Smithfield underpaid Maxwell for certain deliveries of hogs. As alleged, Smithfield

was supposed to pay based on carcass weight; instead, it sometimes used live weight,

resulting in a lower price. Also, at times, Smithfield calculated the amount due using

the lower, live-weight price but then paid an even smaller amount. (See 2d Am.

Compl. ¶¶ 173, 175.)

8. Although Smithfield consented to the amendment that added these new

claims and allegations, it reserved the right to challenge them in a motion to dismiss

under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. Smithfield has

timely filed that motion. (See ECF No. 103.) After full briefing and a hearing on 4

November 2022, the motion is ripe for resolution.

II. LEGAL STANDARD

9. A Rule 12(b)(6) motion “tests the legal sufficiency of the complaint.”

Isenhour v. Hutto, 350 N.C. 601, 604 (1999) (citation and quotation marks omitted).

The motion should be granted only when “(1) the complaint on its face reveals that

no law supports the plaintiff’s claim; (2) the complaint on its face reveals the absence

of facts sufficient to make a good claim; or (3) the complaint discloses some fact that necessarily defeats the plaintiff’s claim.” Corwin v. Brit. Am. Tobacco PLC, 371 N.C.

605, 615 (2018) (citation and quotation marks omitted).

10. In deciding the motion, the Court must treat the well-pleaded allegations of

the complaint as true and view the facts and permissible inferences in the light most

favorable to the nonmoving party. See Sykes v. Health Network Sols., Inc., 372 N.C.

326, 332 (2019); CommScope Credit Union v. Butler & Burke, LLP, 369 N.C. 48, 51

(2016). Exhibits to the complaint are deemed to be part of it and may also be

considered, see Krawiec v. Manly, 370 N.C. 602, 606 (2018), but the Court need not

accept as true any “conclusions of law or unwarranted deductions of fact,” Wray v.

City of Greensboro, 370 N.C. 41, 46 (2017) (citation and quotation marks omitted).

III. ANALYSIS

11. Smithfield moves to dismiss both claims that Maxwell introduced in the

second amended complaint. The Court begins with the claim for fraudulent

concealment.

A. Fraudulent Concealment

12. Maxwell claims that Smithfield committed fraud by concealing its breaches

of the most-favored-nation clause. Smithfield argues that the claim lacks necessary

elements of fraud and is barred by the economic loss rule.

13. Fraud has five “essential elements”: (a) a false representation or

concealment of a material fact, (b) calculated to deceive, (c) made with intent to

deceive, (d) that did in fact deceive, and (e) that resulted in damage to the injured

party. Rowan Cnty. Bd. of Educ. v. U.S. Gypsum Co., 332 N.C. 1, 17 (1992). The injured party’s reliance on the misrepresentation or concealment “must be

reasonable.” Forbis v. Neal, 361 N.C. 519, 527 (2007).

14. Because “silence is fraudulent only when there is a duty to speak,” a claim

based on “concealment or nondisclosure” requires the plaintiff to allege that the

defendant “had a duty to disclose material information.” Lawrence v. UMLIC-Five

Corp., 2007 NCBC LEXIS 20, at *8 (N.C. Super. Ct. June 18, 2007) (citing Griffin v.

Wheeler-Leonard & Co., 290 N.C. 185, 198 (1976)). A duty to disclose arises when the

parties are in a fiduciary relationship, when one party “has taken affirmative steps

to conceal material facts from the other,” or when “one party has knowledge of a latent

defect in the subject matter of the negotiations about which the other party is both

ignorant and unable to discover through reasonable diligence.” Harton v. Harton, 81

N.C. App. 295, 297–98 (1986).

15. Here, there are no allegations that Smithfield and Maxwell were in a

fiduciary relationship. Nor are there allegations that Smithfield had knowledge of a

latent defect that Maxwell, being unaware, could not have discovered through

reasonable diligence.

16. Rather, Maxwell contends, first, that Smithfield’s duty to disclose arose from

their contractual relationship. That is, the PSA and the most-favored-nation clause

together required Smithfield “to disclose to Maxwell any changes to the Economic

Benefits that it offered other suppliers.” (2d Am. Compl. ¶ 156; see also 2d Am.

Compl. ¶ 78.) But our appellate courts have not held that an arm’s-length contractual

relationship—unlike a fiduciary relationship—gives rise to a duty to speak for purposes of fraud. And Maxwell cites no law to support such a theory. A contractual

duty to disclose, if one exists, might support a claim for breach of contract against

Smithfield, but it does not support the claim for fraud.

17. Maxwell also contends that Smithfield took affirmative steps to conceal

offers that it made to other swine suppliers. Affirmative concealment, if adequately

alleged, would give rise to a duty to disclose. See Harton, 81 N.C. App. at 298. After

careful review, though, the Court concludes that Maxwell has not adequately alleged

any affirmative acts of concealment.

18. The second amended complaint is peppered with general allegations that

Smithfield “hid,” never “disclosed,” “prevented Maxwell from learning,” and “took

affirmative steps to conceal” offers of better benefits to other suppliers. (2d Am.

Compl. ¶¶ 99, 128, 139, 158, 159.) These allegations fall well short of the mark.

Nondisclosure alone is not an affirmative act of concealment. And “mere generalities

or conclusory allegations of fraud will not suffice.” Sharp v. Teague, 113 N.C. App.

589, 597 (1994). “To show a duty to disclose based on affirmative steps to conceal a

material fact, a plaintiff must allege the specific affirmative acts taken to conceal that

fact.” Vitaform Inc. v. Aeroflow, Inc., 2020 NCBC LEXIS 132, at *31 (N.C. Super. Ct.

Nov. 4, 2020).

19. The second amended complaint also alleges that Smithfield began sharing

production and sales information with its major suppliers, including Maxwell, in 1994

but stopped doing so in 2007. Maxwell believes that Smithfield stopped sharing this

information to keep it from learning about better economic terms given to other suppliers. (See 2d Am. Compl. ¶¶ 54–59.) These allegations, if true, do not show that

Smithfield affirmatively concealed its production and sales information, only that it

chose not to disclose the information. Moreover, Smithfield made that choice over

fifteen years ago. There are no allegations that, at any time since, Maxwell objected

to Smithfield’s decision to stop providing production and sales information, asked

Smithfield to begin providing the information anew, or was prevented from making

that request. Again, silence alone is not concealment.

20. Maxwell does allege that it asked Smithfield about compliance with the

most-favored-nation clause and that Smithfield responded by falsely stating that it

was “paying more for Maxwell’s hogs than it was for any other supplier.” (2d Am.

Compl. ¶ 160; see also, e.g., 2d Am. Compl. ¶¶ 60, 80, 128.) False statements are

better viewed as misrepresentations than as concealments or omissions. Either way,

Maxwell is required to plead the false statements with particularity. See N.C. R. Civ.

P. 9(b). This means that Maxwell must allege “the ‘time, place and content’ of the

misrepresentation, the ‘identity of the person making the representation,’ and ‘what

was obtained as a result.’ ” Bucci v. Burns, 2017 NCBC LEXIS 83, at *8 (N.C. Super.

Ct. Sept. 14, 2017) (quoting Terry v. Terry, 302 N.C. 77, 85 (1981)). Or, viewed as

concealment, Maxwell must allege with particularity “the event or events triggering

the duty to speak,” the relevant “time period,” and the “content of the information

that was withheld,” among other things. Lawrence, 2007 NCBC LEXIS 20, at *9

(citation and quotation marks omitted). 21. As best the Court can tell, the second amended complaint identifies only

three specific false statements. Each lacks the necessary particularity or is otherwise

insufficient.

22. The first is a statement by Larry Pope, Smithfield’s President and COO. As

alleged, Pope wrote to Maxwell in July 2003 that “[e]very document I have shows that

Smithfield pays at least, if not more, for your hogs than any others whether in the

east or the Midwest.” (2d Am. Compl. ¶ 62.) At no point, however, does Maxwell

allege that Pope’s statement was false. In fact, Maxwell alleges that Smithfield began

offering better terms to other suppliers in 2011—eight years after Pope’s statement.

(See 2d Am. Compl. ¶ 157.) In addition, Maxwell does not allege with particularity

why its reliance was reasonable, including whether it was denied the opportunity to

investigate or whether it could not have learned the truth through reasonable

diligence. See, e.g., Sullivan v. Mebane Packaging Grp., Inc., 158 N.C. App. 19, 26

(2003); Lawrence, 2007 NCBC LEXIS 20, at *9. This is a notable omission because

Maxwell alleges that Smithfield was voluntarily sharing its production and sales

information for years before and after Pope’s statement. (See, e.g., 2d Am. Compl.

¶¶ 54–58.)

23. The second statement came from Chuck Allison, another representative of

Smithfield. Maxwell alleges that “sometime in 2014,” Allison falsely stated that

“Smithfield was already paying more for Maxwell’s hogs than it paid for any other

supplier’s hogs.” (2d Am. Compl. ¶ 67.) The level of particularity required in a

pleading depends on the circumstances. “Relevant factors include ‘the nature of the case, the complexity or simplicity of the transaction or occurrence, the relationship of

the parties and the determination of how much circumstantial detail is necessary to

give notice to the adverse party and enable him to prepare a responsive pleading.’ ”

Bucci, 2017 NCBC LEXIS 83, at *8 (quoting United States v. Wells Fargo Bank, N.A.,

972 F. Supp. 2d 593, 616 (S.D.N.Y. 2013)). This dispute involves two large,

sophisticated entities with a longstanding business relationship governed by a

complex commercial contract. The Court concludes that Maxwell has not pleaded

enough circumstantial detail regarding the timing of Allison’s statement (a reference

to one year in a relationship lasting three decades) or its content (a reference to

“paying more” in the context of a complex contract involving formulas, matrices,

discounts, and more). Nor has Maxwell alleged with particularity what it is that

Allison’s statement supposedly concealed, such as which suppliers were receiving

better terms at the time of the statement and what those terms were.

24. The third statement also came from Allison. Maxwell alleges that it asked

Smithfield, in August 2018, to switch to a new Grade and Yield Matrix for pricing.

In response, Allison represented that “[t]here is no advantage to moving matrices”

and attached a “materially misleading” spreadsheet in support. (2d Am. Compl.

¶¶ 69–71.) Yet there are no particularized allegations to show what was materially

misleading in the spreadsheet. In addition, the allegations of reliance are lacking.

Maxwell alleges that it reasonably chose not to challenge Allison’s statement because

Smithfield had exclusive knowledge of the economic benefits that it gave to other

suppliers. (See 2d Am. Compl. ¶ 72.) This does not excuse Maxwell’s failure to exercise due diligence because Allison’s statement concerned known potential

economic benefits—which of two matrices would be more advantageous for Maxwell—

not unknown benefits given to other suppliers.

25. Accordingly, the Court grants the motion to dismiss the fraudulent

concealment claim. The Court also dismisses Maxwell’s request for punitive

damages, which is wholly dependent on the fraud claim. Having reached this

conclusion, the Court need not address the parties’ arguments concerning the

economic loss rule.

B. Statute of Limitations

26. In the second amended complaint, Maxwell alleges that Smithfield is

estopped, because of its fraud, from asserting the statute of limitations as a defense

to the claim for breach of the most-favored-nation clause. Smithfield argues that

dismissal of the fraud claim means that Maxwell has no basis to assert estoppel.

Smithfield further argues that, as a result, the statute of limitations partly bars

Maxwell’s claim for breach of the most-favored-nation clause.

27. “In order for a defendant to succeed on a 12(b)(6) motion to dismiss based on

a statute of limitations, he must show that the plaintiff’s complaint on its face

discloses that the action is time-barred.” Dawn v. Dawn, 122 N.C. 493, 495 (1996).

On a contract for the sale of goods, a plaintiff must bring an action for breach of

contract within “four years after the cause of action has accrued.” N.C.G.S.

§ 25-2-725(1). “A cause of action accrues when the breach occurs, regardless of the

aggrieved party’s lack of knowledge of the breach.” Id. § 25-2-752(2). 28. Maxwell filed this suit in August 2020, meaning that the limitations period

stretches back to August 2016. It is undisputed that Maxwell has alleged one or more

breaches of the most-favored-nation clause within that period. Thus, the face of the

complaint does not show that the claim is time-barred.

29. Smithfield’s position is that the second amended complaint also includes

allegations about breaches that occurred before August 2016 and that these

allegations are time-barred. It may be true that the statute of limitations operates

to limit Maxwell’s potential recovery for this claim. Even so, a motion to dismiss is

not suited to an allegation-by-allegation application of the statute of limitations.

Rather, this dispute is better suited to summary judgment or to evidentiary motions

in anticipation of trial.

30. Accordingly, the Court denies Smithfield’s motion to the extent it seeks

partial dismissal of Maxwell’s claim for breach of the most-favored-nation clause.

C. Breach of the PSA’s Price Term

31. Maxwell claims that Smithfield breached the PSA’s price term. Smithfield

moves to dismiss the claim on the ground that it does not allege the specific provisions

of the PSA that were supposedly breached.

32. North Carolina remains a notice pleading State, see N.C. R. Civ. P. 8(a), and

“claims for breach of contract are ‘not subject to heightened pleading standards,’ ”

Vanguard Pai Lung, LLC v. Moody, 2019 NCBC LEXIS 39, at *10 (N.C. Super. Ct.

June 19, 2019) (quoting AYM Techs., LLC v. Rodgers, 2018 NCBC LEXIS 14, at *52

(N.C. Super. Ct. Feb. 9, 2018)). To state a claim, a plaintiff must allege the existence of a valid contract and breach of that contract’s terms. See Poor v. Hill, 138 N.C. App.

19, 26 (2000).

33. The second amended complaint does both. It alleges that the PSA exists and

attaches the contract as an exhibit. It also alleges that the PSA obligated Smithfield

to pay for hogs based on their “carcass weight” but that Smithfield sometimes paid

based on their “live weight,” resulting in an underpayment. (2d Am. Compl. ¶ 173.)

And it alleges that Smithfield sometimes paid even less than the live-weight formula

would have required. (See 2d Am. Compl. ¶ 175.) Yes, naming a specific contractual

provision by paragraph number or quoting its language would make the claim more

clear. But notice pleading rules do not require that level of detail. These allegations

are sufficient to put Smithfield on notice of the events that give rise to the claim and

to allow it to answer and prepare for trial.

34. The Court therefore denies Smithfield’s motion to dismiss the claim for

breach of the PSA’s price term.

IV. CONCLUSION

35. For all these reasons, the Court GRANTS the motion to dismiss Maxwell’s

claim for fraudulent concealment and the related request for punitive damages. The

claim is DISMISSED with prejudice. In all other respects, the Court DENIES the

motion. SO ORDERED, this the 3rd day of February, 2023.

/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases