Somersault Snack Co, LLC v. Baptista Bakery, Inc.

• Court: District Court, N.D. California
• Decided: November 20, 2019
• Docket: 4:19-cv-03131
• Status: Unknown

Opinion

1 2 UNITED STATES DISTRICT COURT 3 NORTHERN DISTRICT OF CALIFORNIA 4 5 SOMERSAULT SNACK CO, LLC, Case No. 19-cv-03131-DMR

6 Plaintiff, ORDER ON DEFENDANT'S MOTION 7 v. TO DISMISS

8 BAPTISTA BAKERY, INC., Re: Dkt. No. 16 9 Defendant.

10 Plaintiff Somersault Snack Co, LLC (“Somersault”) filed this action on June 5, 2019, 11 alleging a breach of contract claim against Defendant Baptista Bakery, Inc. (“Baptista”). [Docket 12 No. 1.] Baptista now moves to dismiss Somersault’s complaint pursuant to Federal Rule of Civil 13 Procedure 12(b)(6). [Docket Nos. 16 (“Mot.”), 20 (“Reply”).] Somersault timely opposed. [Docket 14 No 19 (“Opp.”).] The court held a hearing on September 17, 2019. 15 Having considered the parties’ submissions and oral arguments, the court grants in part and 16 denies in part the motion to dismiss. 17 I. BACKGROUND The following facts come from the complaint. Somersault sells all-natural snacks in 18 numerous states, including California. Compl. ¶ 8. It entered into a contract with Baptista, effective 19 January 1, 2015, which provided that Baptista would be the sole manufacturer of Somersault’s 20 products. Id. ¶ 9; Id., Ex. A (“Agreement”). In summer 2017, Baptista allegedly informed 21 Somersault that it was going to raise the price of manufacturing Somersault’s products by more than 22 70%. Id. ¶ 14. Somersault contested the price hike, arguing that Baptista could not raise its prices 23 without a cost justification until December 2018. Id. ¶ 15. According to Somersault, Baptista 24 responded that it was going to terminate the Agreement. Id. ¶ 16. Baptista also allegedly began 25 producing defective products that did not conform with the specifications agreed to by the parties. 26 Id. ¶ 17. Such defects included products that had packaging that was not completely sealed or were 27 overcooked, undercooked, or moldy. Id. 1 Somersault claims that it repeatedly informed Baptista of the product defects. Compl. ¶ 19. 2 It also “requested an opportunity to inspect the manufacturing of Somersault’s products during 3 product runs,” but Baptista allegedly did not allow Somersault to attend the product runs. Id. ¶¶ 19- 4 20. Despite the poor quality of the products, Somersault did not stop selling the products because 5 Baptista was its exclusive manufacturer and “having no products in the marketplace for several 6 weeks would have been disastrous to Somersault’s sales and business.” Id. ¶ 23. According to 7 Somersault, Baptista’s defective products are “worth less than non-defective products would have 8 been,” resulting in damage to Somersault’s brand and loss of customers. Id. ¶¶ 25-26. Somersault brings a breach of contract claim based on the implied covenant of good faith 9 and fair dealing. Compl. ¶¶ 29-34. Baptista moves to dismiss the complaint on the basis that 10 Somersault failed to adequately plead its claim. Jurisdiction is based on the diversity of the parties. 11 Id. at ¶¶ 2-3. 12 II. LEGAL STANDARD FOR RULE 12(B)(6) MOTIONS 13 A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in 14 the complaint. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). When 15 reviewing a motion to dismiss for failure to state a claim, the court must “accept as true all of the 16 factual allegations contained in the complaint,” Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per 17 curiam) (citation omitted), and may dismiss a claim “only where there is no cognizable legal theory” 18 or there is an absence of “sufficient factual matter to state a facially plausible claim to relief.” 19 Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citing Ashcroft 20 v. Iqbal, 556 U.S. 662, 677-78 (2009); Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)) 21 (quotation marks omitted). A claim has facial plausibility when a plaintiff “pleads factual content 22 that allows the court to draw the reasonable inference that the defendant is liable for the misconduct 23 alleged.” Iqbal, 556 U.S. at 678 (citation omitted). In other words, the facts alleged must 24 demonstrate “more than labels and conclusions, and a formulaic recitation of the elements of a cause 25 of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (citing Papasan v. 26 Allain, 478 U.S. 265, 286 (1986)). 27 As a general rule, a court may not consider “any material beyond the pleadings” when ruling 1 on a Rule 12(b)(6) motion. Lee, 250 F.3d at 688 (citation and quotation marks omitted). However, 2 “a court may take judicial notice of ‘matters of public record,’” id. at 689 (citing Mack v. S. Bay 3 Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)), and may also consider “documents whose 4 contents are alleged in a complaint and whose authenticity no party questions, but which are not 5 physically attached to the pleading,” without converting a motion to dismiss under Rule 12(b)(6) 6 into a motion for summary judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled 7 on other grounds by Galbraith, 307 F.3d at 1125-26. The court need not accept as true allegations 8 that contradict facts which may be judicially noticed. See Mullis v. U.S. Bankr. Court, 828 F.2d 1385, 1388 (9th Cir. 1987). 9 III. ANALYSIS 10 The Agreement designates Delaware law as controlling. See Agreement § 22. A federal 11 court sitting in diversity applies the choice of law rules of the forum in which it sits. Klaxon Co. v. 12 Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). “Under California conflict of law rules, the parties 13 may agree to what law controls, unless the choice is contrary to a fundamental interest of a state 14 with a materially greater interest.” Rennick v. O.P.T.I.O.N. Care, Inc., 77 F.3d 309, 313 (9th Cir. 15 1996). Neither party disputes that the Agreement’s choice-of-law provision applies here. 16 Accordingly, Somersault’s breach of contract claim is governed by Delaware law. 17 In Delaware, the elements for a breach of contract claims are (1) “the existence of the 18 contract, whether express or implied”; (2) “the breach of an obligation imposed by that contract”; 19 and (3) “the resultant damage to the plaintiff.” Avaya Inc., RP v. Telecom Labs, Inc., 838 F.3d 354, 20 389 (3d Cir. 2016) (quoting VLIW Tech., LLC v. Hewlett Packard Co., 84 A.2d 606, 612 (Del. 21 2003)). Under Delaware law, “the proper interpretation of language in a contract is a question of 22 law.” Ross v. Thomas, 728 F. Supp. 2d 274, 281 (S.D.N.Y. 2010) (quoting 23 Allied Capital Corp. v. GC–Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006)) (applying 24 Delaware law). “Clear and unambiguous language found in a contract is to be given its ordinary 25 and usual meaning.” Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581 (D. Del. 2007) 26 (further quotations and citations omitted). 27 Baptista challenges Somersault’s complaint on two bases: (1) that Somersault has not 1 adequately pleaded that Baptista breached an obligation imposed by the Agreement and (2) that 2 Somersault’s claimed damages are not available under the Agreement. 3 A. Breach of Contract 4 Somersault asserts that Baptista has breached both the express and implied terms of the 5 contract. These arguments are addressed in turn. 6 1. Express Contract Terms 7 As an initial matter, the complaint does not make specific allegations that Baptista breached 8 the express terms of the contract. Under its sole cause of action for breach of contract, Somersault refers to the implied covenant of good faith and fair dealing and the Agreement’s indemnification 9 clause but does not clearly explain which provisions of the Agreement Baptista allegedly breached. 10 See Compl. ¶¶ 29-34. 11 In its opposition brief, Somersault identifies four contract provisions that Baptista allegedly 12 breached. First, it cites paragraph 3.1 of the Agreement, which provides that “Supplier will supply 13 Products according to the formulations and specifications for each Product . . . furnished by 14 Somersault to Supplier . . . .” Agreement ¶ 3.1. Somersault argues that Baptista breached this 15 provision by providing Somersault with “numerous non-conforming products.” Opp. at 5. 16 Although Somersault’s allegations about the defective products are in the complaint, the complaint 17 does not cite paragraph 3.1 nor is it otherwise clear that Somersault’s cause of action is based in part 18 on this provision. Therefore, Somersault shall amend its complaint to identify this provision and 19 describe how Baptista’s actions constitute a breach of it. 20 Second, Somersault relies on paragraph 8.2(b), which provides that provides that “No act or 21 omission of Supplier in performing its obligations under this Agreement will contribute to or result 22 in . . . any Product failing to be of merchantable quality, fit for its intended purpose as food for 23 human consumption.” Agreement ¶ 8.2. While Somersault cites paragraph 8.2(b) in the complaint, 24 it is ambiguous as to whether Somersault alleges that the products at issue were not fit for human 25 consumption. Somersault claims that the products were overcooked, undercooked, and moldy 26 (among other issues), but it does not specifically assert that these defects rendered the products unfit 27 for human consumption as required by paragraph 8.2(b). Accordingly, Somersault shall amend its 1 complaint to clarify its allegations regarding paragraph 8.2(b). 2 Third, Somersault cites paragraph 9.4, which permits it to inspect Baptista’s facilities. 3 Paragraph 9.4 is mentioned in the complaint. Compl. ¶ 11. Further, Somersault alleges that Baptista 4 prohibited it from inspecting the areas where Baptista manufactured the products. Id. ¶ 32. Baptista 5 argues that Somersault had other opportunities to inspect the products before accepting them, and 6 so there was no violation of section 9.4 to support a breach of contract claim. Mot. at 3. However, 7 Baptista’s contention goes to the merits of the claim and not to whether the claim is adequately 8 pleaded. As a pleading matter, Somersault has sufficiently alleged a breach of section 9.4. Finally, paragraphs 17.1-4 lay out the indemnification provisions of the Agreement and 9 Somersault argues that Baptista breached these provisions by refusing to indemnify Somersault for 10 the damages caused by Baptista’s breaches. Opp. at 5. Even assuming the indemnification clause 11 applies to Baptista, which the parties dispute, that provision itself cannot serve as the basis for a 12 breach of contract claim. See Greenstar, LLC v. Heller, 934 F. Supp. 2d 672, 692 (D. Del. 2013) 13 (“A plaintiff’s claim for breach of the indemnification provisions of the Agreement becomes ripe 14 after liability for breach of the Agreement . . . has been established.”); see also LaPoint v. 15 AmerisourceBergen Corp., 970 A.2d 185, 197–98 (Del. 2009) (“In a contract . . . in which one party 16 agrees to indemnify the other for damages . . . arising from that party’s breach of the contract, the 17 term ‘indemnity’ has a distinct legal meaning that permits the party seeking indemnification to bring 18 a separate cause of action for indemnification after first bringing a successful action for breach of 19 the contract.”). 20 Since an indemnification claim is brought after a successful breach of contract action, 21 logically it cannot serve as the basis for the preceding claim. At the hearing, Somersault conceded 22 that a breach must be established before indemnification becomes relevant. It also argued that the 23 indemnification issue could be determined in this action after the court rules on the merits. The 24 court finds that a potential indemnification claim presents a separate issue that is inappropriate to 25 address at this juncture. Accordingly, Somersault’s allegations regarding the indemnification clause 26 are dismissed without prejudice. 27 Somersault is granted leave to amend its complaint to address the deficiencies identified 1 above, where possible. 2 2. Implied Contract 3 In order to plead a breach of an implied covenant of good faith and fair dealing, the plaintiff 4 must allege the existence of “a specific implied contractual obligation, a breach of that obligation 5 by the defendant, and resulting damage to the plaintiff.” Anderson, 497 F. Supp. 2d at 581-82 6 (quoting Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998)) (further citations 7 omitted). In evaluating an implied covenant claim, the court decides “whether the language of the 8 contract expressly covers a particular issue, in which case the implied covenant will not apply, or whether the contract is silent on the subject, revealing a gap that the implied covenant might fill.” 9 Reklam v. Bellator Sport Worldwide LLC, 2017 WL 5172397, at *5 (D. Del. Nov. 8, 2017), report 10 and recommendation adopted, 2017 WL 5985562 (D. Del. Dec. 1, 2017). “The implied covenant 11 will not infer language that contradicts a clear exercise of an express contractual right.” Nemec v. 12 Shrader, 991 A.2d 1120, 1127 (Del. 2010). The court must “assess the parties’ reasonable 13 expectations at the time of contracting and not rewrite the contract to appease a party who later 14 wishes to rewrite a contract he now believes to have been a bad deal.” Id. at 1126. 15 Somersault alleges that there are two implied terms in the Agreement that serve as a basis 16 for this claim, namely that Baptista “(1) could not abandon quality control procedures in order to 17 punish Plaintiff or deprive Plaintiff of the benefits of the Agreement; and (2) could not refuse to 18 manufacture replacement products in a timely fashion.” Opp. at 6. Baptista responds that the issues 19 of quality control and timely delivery of products are addressed in the contract, which provides 20 Somersault remedies in case it finds its products do not conform with specifications. Reply at 3. For 21 example, paragraph 5.4 of the Agreement provides that “[i]f prior to Somersault’s acceptance any 22 portion of a shipment of Products is found to not be in compliance with the Specifications, 23 Somersault may avail itself of any and all remedies available to it,” including cancelling the order 24 or returning the shipment to Baptista, at Baptista’s cost. According to Baptista, there cannot be a 25 breach of the implied covenant of good faith and fair dealing because the agreement explicitly 26 covers the terms that Somersault states are implied. 27 1 remedies for some of the conduct alleged by Somersault, they do not contradict the implied terms 2 alleged by Somersault. There is no contractual provision that permits Baptista to abandon quality 3 control procedures when the parties disagree about the terms of the contract, as alleged by 4 Somersault. There is also no explicit contractual term governing the timing of delivering products, 5 which Baptista conceded at the hearing. The implied terms suggested by Somersault are not 6 contradicted by the express language of the contract and therefore may serve as the basis for a breach 7 of the implied covenant of good faith and fair dealing. 8 B. Damages 9 Baptista argues that the complaint is only seeking consequential damages, which are barred 10 by the Agreement’s limitation of liability clause. It asserts that because Somersault has not alleged 11 that it suffered any recoverable damages, the complaint must be dismissed. Somersault raises two 12 arguments in response. First, it asserts that it seeks direct rather than consequential damages as a 13 result of Baptista’s alleged breach of warranty. Opp. at 5. Second, it contends that it can also 14 recover consequential damages despite the limitation of liability clause because of the essential 15 purpose doctrine. Id., fn. 2. 1. Direct Damages 16 Somersault argues that it is entitled to direct damages as a result of Baptista’s alleged breach 17 of contract, where direct damages are defined as “the difference at the time and place of acceptance 18 between the value of the goods accepted and the value they would have had if they had been as 19 warranted, unless special circumstances show proximate damages of a different amount.” See Del. 20 Code Ann. tit. 6, § 2-714(2). It contends that these damages are not excluded by the Agreement’s 21 limitation of liability provision, which excludes only incidental and consequential damages. Opp. 22 at 5. 23 The authority Somersault cites relates to breach of warranty claims. See Del. Code Ann. tit. 24 6, § 2-714(2) (providing “[t]he measure of damages for breach of warranty” (emphasis added)). 25 The sole claim for relief in the complaint is for the breach of the implied covenant of good faith and 26 fair dealing. Somersault has not pleaded a breach of warranty claim to support its claim for direct 27 damages under section 2-714(2). Nor has it provided authority for what direct damages are available 1 for its other causes of action. 2 In its amended complaint, Somersault shall identify each class of damages it is seeking and 3 which causes of action support those damages. 4 2. Consequential Damages 5 “Delaware law permits parties to limit or alter the measure of damages recoverable under a 6 contract,” such as through a limitation of liability provision. OC Tint Shop, Inc. v. CPFilms, Inc., 7 2018 WL 4658211, at *3 (D. Del. Sept. 27, 2018) (quoting Del. Code Ann. tit. 6 § 2-719(1), (3)) 8 (internal quotation marks omitted). Where the parties contract for an exclusive remedy “in substitution for the measure of damages recoverable under the Code, that remedy is the buyer’s sole 9 recourse.” Beal v. Gen. Motors Corp., 354 F. Supp. 423, 427 (D. Del. 1973) (internal quotation 10 marks omitted). But if the contracted-for remedy “fail[s] of its essential purpose, the purchaser may 11 resort to the remedies provided by the Uniform Commercial Code.” Norman Gershman’s Things 12 To Wear, Inc. v. Mercedes-Benz of N. Am., Inc., 558 A.2d 1066, 1070–71 (Del. Super. Ct. 1989) 13 (citing Del. Code Ann. tit. 6, § 2-719(2)). In other words, the parties are not bound by limitation of 14 liability provisions if the exclusive alternate remedies provided by the contract fail of their essential 15 purposes. 16 The limitation of liability provision in the Agreement prohibits the recovery of consequential 17 damages: 18 IN NO EVENT SHALL ANY PARTY, OR SUCH PARTY’S PARENT 19 ENTITY, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR 20 AFFILIATES, BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, 21 PUNITIVE OR EXEMPLARY DAMAGES, COSTS OR EXPENSES (INCLUDING BUT NOT LIMITED TO, LOST PROFITS, LOST 22 REVENUES AND/OR LOST SAVINGS), WHETHER BASED UPON A CLAIM OR ACTION OF CONTRACT, WARRANTY, 23 NEGLIGENCE, STRICT LIABILITY OR OTHERWISE. 24 Agreement § 25 (bold font and capitalization in original). Baptista seeks to dismiss Somersault’s 25 complaint insofar as it seeks consequential damages because these are explicitly prohibited by the 26 provision quoted above. Somersault contends that the limitation of liability provision is 27 unenforceable because of the essential purpose doctrine. 1 enforceable under the contractual relations of the parties and the nature of the contractual 2 performance are matters which generally should not be decided on the pleadings or on summary 3 judgment.” J. A. Jones Const. Co. v. City of Dover, 372 A.2d 540, 553 (Del. Super. Ct. 1977) (citing 4 cases). As noted in Livery Coach Sols., L.L.C. v. Music Express/E., Inc., 245 F. Supp. 3d 639 (D. 5 Del. 2017), “Delaware courts have sometimes been able to resolve disputes as to enforceability of 6 a limited liability clause on summary judgment.” 245 F. Supp. 3d at 650 n. 5 (citing cases). Other 7 courts have found triable issues of fact relating to enforceability. Petroleum v. Magellan Terminals 8 Holdings, L.P., 2015 WL 3885947, at *24 (Del. Super. Ct. June 23, 2015) (declining to enforce a limitations of damages clause at the summary judgment stage because the analysis requires an 9 examination of the “particular facts of the parties’ conduct”); MMCA Grp., LTD v. Hewlett-Packard 10 Co., No. 06-cv-7067-MMC, 2010 WL 147937, at *2 (N.D. Cal. Jan. 12, 2010) (declining summary 11 judgment on a limitation of liability clause under Delaware law). 12 Particularly given that Somersault briefed the essential purpose doctrine in a footnote, the 13 court declines to decide now whether this issue is appropriate for summary judgment or must be 14 resolved at trial. Regardless, the inquiry is premature at the pleadings stage. See Data Centers, LLC 15 v. 1743 Holdings LLC, 2015 WL 9464503, at *5 (Del. Super. Ct. Oct. 27, 2015) (“Despite the court’s 16 best efforts, it is unable to locate any case where a Delaware court enforced a purported limitation 17 on damages upon a motion to dismiss.”). Accordingly, Baptista’s motion to dismiss Somersault’s 18 claim for consequential damages is denied. 19 IV. CONCLUSION 20 For the foregoing reasons, the court grants in part and denies in part Baptista’s motion to 21 dismiss. By December 4, 2019, Somersault must file an amended complaint that addresses the 22 deficiencies identified in this order. A further case management conference is scheduled for January 23 15, 2020 at 1:30 p.m. An updated joint case management statement is due by January 8, 2020. 24 IT IS SO ORDERED. 25 Dated: November 20, 2019 26 ______________________________________ 27 Donna M. Ryu