ORDER
This matter comes before the court upon defendant Quality Egg’s motion to-dismiss seven of plaintiff NuCal’s eight claims. (ECF 70.) This motion was decided without a hearing. For the following reasons, defendant’s motion to dismiss is DENIED in part and GRANTED in part.
I. ALLEGED FACTS AND PROCEDURAL HISTORY
This case arises out of a massive recall in August 2010 of shell eggs precipitated by an outbreak of salmonella enteritidis (“SE”) that sickened as' many as 62,000 people. (First Am. Compl. ¶ 1) (“FAC”). At all times relevant to this action, plaintiff purchased eggs from defendant through a commercial exchange called the “Egg Clearinghouse, Inc.” (“ECI”). (Id. ¶ 79.) Plaintiff alleges that defendant became aware of a heightened risk of SE contamination at defendant’s farms in early 2010.
On July 9, 2010, new federal egg safety rules took effect. (Id. ¶ 13.) These rules require SE positive farms to divert eggs to other facilities or to keep them out of the market until tests confirm they are contamination free. (Id.) Plaintiff alleges defendant, through omissions and misrepresentations, failed to comply with these new rules; for example, defendant represented it would notify plaintiff of any SE positive environmental tests involving farms that produced eggs plaintiff purchased. (Id. ¶¶ 156-157.) Plaintiff alleges defendant acted upon defendant’s knowledge of the SE positive tests only when the FDA stepped in. (Id. ¶ 15.) Defendant then tested eggs produced at its farms and discovered about 170 SE-infected eggs. (Id. ¶ 16.) Defendant finally instituted a recall in August 2010. (Id. ¶ 1.) Before, during and after the recall, defendant allegedly obfuscated and failed to cooperate fully with the FDA and with the U.S. House of Representatives’ inquiry into the SE outbreak. (Id. ¶¶ 15,17.)
Plaintiff filed its initial complaint on November 18, 2010 against three defendants, Quality Egg LLC (“Quality Egg”), Wright County Egg, and Hillandale Farms, alleging seven causes of action. (ECF 1.) The court granted plaintiffs motion to amend on January 27, 2012,
On August 15, 2012, defendants Jack DeCoster, DeCoster Trust, DeCoster Enterprises, and Environ/Wright County were dismissed from this action for lack of personal jurisdiction. (ECF 156.) The remaining defendants are the three Hillandale entities and Quality Egg.
Defendant Quality Egg moves to dismiss all but claim VI. Defendant argues plaintiffs fraud and negligence claims, claims IV, V and VII, are barred by the economic loss rule. Defendant asserts claims I, II and III lack essential elements. Finally, defendant avers that counts IV and VIII fail because they do not state fraud causes
II. STANDARD
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for “failure to state a claim upon which relief can be granted.” A court may dismiss “based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t,
Although a complaint need contain only “a short and plain statement of the claim showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), in order to survive a motion to dismiss this short and plain statement “must contain sufficient factual matter ... to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
In making this context-specific evaluation, this court “must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles,
III. APPLICATION
A. The Economic Loss Rule
Plaintiff alleges wide-ranging damages, including lost sales, lost profits, recall-related administrative costs, and the loss of goodwill and reputation for the recalled brands. (FAC ¶¶ 158, 163.) Plaintiff also alleges its buyers have demanded credit for the recalled eggs and for their incidental and consequential costs related to the recall, and demanded that certain brand names be retired due to the recall. {Id. ¶¶ 158, 163.) Plaintiff further seeks compensatory damages because it “has suffered lost future business and sales from customers who have blamed NuCal for the disruption, loss of goodwill and food safety panic that resulted from the defendant’s negligence and misconduct, or who have associated NuCal and NuCal’s brands with the defendant’s negligence and misconduct.” {Id. ¶ 174.)
Defendant contends plaintiff does not allege the recalled eggs caused any physical harm to individuals or property and is
However, plaintiff contends its losses were not limited to those arising from the defective eggs; rather, its recall “necessarily included all eggs that NuCal processed on the dates when the defendants’ SE-tainted eggs were in NuCal’s processing plants,” and many of these eggs had nothing to do with plaintiffs contractual relationship with defendants. (Id.) Specifically, plaintiff alleges that its losses also included “the product cartons and other materials that NuCal used to package the defendant’s SE-tainted eggs” and “[t]he destruction of eggs from other sources, as well as the destruction of packaging materials.” (Id.) These losses, plaintiff contends, constitute damages to other property that takes plaintiffs negligence claims outside the scope of the economic loss rule (Id.)
Defendant replies that most of this damage to other property is not pled in the first amended complaint. (Reply at 5-6, ECF 114.) Plaintiff did not allege which eggs were recalled, defendant contends, and did not specifically allege that any eggs were physically damaged (Id.) Defendants also argue they owed plaintiff no legal duty independent of the contract and that the parties did not have a “special relationship” such that the economic loss rule’s other exceptions would apply. (Id. at 6-8.)
Generally, purely economic losses are not recoverable in tort. S.M. Wilson & Co. v. Smith Int’l, Inc.,
“Economic loss ... has been defined as the diminution in value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold. ‘Economic loss generally means pecuniary damage that occurs through loss of value or use of the goods sold or the cost of repair together with consequential lost profits when there has been no claim of personal injury or damage to other property.’ ” San Francisco Unified Sch. Dist. v. W.R. Grace & Co.,
The court finds the economic loss rule does not entirely bar plaintiffs negligence claims because plaintiff has sufficiently pled damage to “other property.” In support of its contention that it suffered damage to other property, namely other eggs and materials unrelated to the Quality Egg contract, plaintiff cites to two paragraphs in the First Amended Complaint:
In accordance with usual practice in the industry, NuCal sold the eggs it purchased from “Wright County Egg” and Hillandale together with eggs from other sources. NuCal sold and distributed these eggs to several retail customers. As a result of defendants’ conduct, Nu-Cal also faces a loss of business for egg brands that it sold and that have now become associated with the defendants’ practices. At least one NuCal customer refused to accept further shipments of cartons bearing a brand name that was included in the recall. The defendants’ conduct also resulted in a decline in egg sales by NuCal and others.
(FAC ¶¶ 92, 104.) The product at issue here, for the purposes of economic loss analysis, is defendant Quality Egg’s eggs. If plaintiff has sufficiently alleged damage to property other than Quality Egg’s eggs, then the economic loss rule does not apply.
The court can reasonably infer from the two paragraphs in the complaint and other alleged facts that plaintiff plausibly suffered damages to other property, such as “[t]he destruction of eggs from other sources, as well as the destruction of packaging materials.... ” (ECF 96 at 9.); see Usher v. City of Los Angeles,
Public policy rationales utilized by the California Supreme Court in economic loss cases also weigh in favor of allowing plaintiffs negligence claims to proceed. In Robinson, the court held that tort damages are particularly appropriate in instances where a defendant’s conduct violates social policy. Id. at 993,
The remainder of plaintiffs alleged damages, including loss of reputation and lost profits and sales, is covered by the economic loss rule and cannot sound in tort. This kind of damage is “pecuniary damage that occurs through loss of value or use of the goods sold or the cost of repair together with consequential lost profits ....” San Francisco Unified, Sch. Dist.,
Plaintiffs contention that it can still recover for these economic damages because exceptions to the economic loss rule apply fails. Plaintiff avers defendant breached a duty independent of the contract; in the alternative, plaintiff asserts a “special relationship” existed between the parties. (ECF 97 at 1N12.) The court finds that defendant did breach a duty independent of the contract, but this fact cannot sustain plaintiffs negligence claims. As described below in the discussion of plaintiffs fraud claim, Robinson holds that the independent duty exception to the economic loss rule can apply to claims of intentionally tortious conduct, but the court can find no case law to suggest this exception can apply to negligent conduct. Robinson,
The court also finds that no special relationship existed between the parties to this motion. To determine whether a special relationship exists, courts must examine six factors: 1) the extent to which the transaction was intended to affect the plaintiff; 2) the foreseeability of harm to the plaintiff; 3) the degree of certainty that the plaintiff suffered injury; 4) the closeness of the connection between the defendant’s conduct and the injury suffered; 5) the moral blameworthiness of defendant’s conduct; and 6) policy considerations to prevent future harm. J'Aire Corp.,
Plaintiff cites paragraphs in the first amended complaint to support its contention that the egg sales at issue here were intended to affect it. (FAC ¶¶ 162, 172; ECF 97 at 13.) Those paragraphs do .not demonstrate that defendant’s sale of eggs were intended peculiarly to affect plaintiff as opposed to all other purchasers similarly situated. They state instead that defendant knowingly sold eggs to plaintiff knowing plaintiff would repackage them with other brands of eggs. The court declines to find a special relationship here and convert a negligent breach of contract into a tort action. See Erlich,
2. Plaintiffs Fraud Claim (Claim IV)
Plaintiffs fraud claim is not barred by the economic loss rule in any respect. See Robinson,
Defendant argues the economic loss rule, as interpreted in Robinson, forecloses recovery for failure to disclose or intentional concealment. (ECF 70 at 8.) It also asserts plaintiffs intentional misrepresentation theory is barred by the economic loss rule. (Id. (citing Robinson and Multifamily Captive Group, LLC v. Assurance Risk Managers, Inc.,
Robinson explicitly did not address the question whether a case involving material omissions, rather than affirmative misrepresentation, would similarly be exempt from the economic loss rule. Robinson,
Ultimately, the court finds Robinson controls the question whether an independent duty exists in this case such that plaintiffs fraud claim can go forward on any theory of intentionally tortious conduct. In Robinson, the defendant made affirmative misrepresentations and/or concealed material facts regarding the specifications of sprag clutches
Here, but for defendants’ alleged intentional misrepresentations and omissions relating to the high risk and then the existence of SE in their farms, hens, and eggs, plaintiff alleges it would not have accepted delivery of and sold the nonconforming eggs, nor would plaintiff have incurred the same amount of damages. (FAC ¶¶ 151-159.) Defendant’s breach of contract involved selling nonconforming eggs from nonconforming farms; its tortious conduct involved, at least, its intentional failure to disclose that its farms, hens, and possibly eggs were infected with SE. Plaintiff pleads this intentionally tortious conduct clearly in the operative complaint: “Defendants failed to disclose problems at their farms to NuCal because they knew that NuCal would have stopped purchasing from defendants .... ” {Id. ¶ 154.) Like the defendant in Robinson, defendant here has also allegedly exposed plaintiff to liability for personal damages for some of the 62,000 people who were sickened as a result of this SE outbreak and to potential
Finally, defendants’ conduct violated social policy such that tort remedies are appropriate. Id. at 991-92,
Plaintiffs fraud claim may proceed in its entirety.
B. Plaintiffs Express Warranty Claim (III) and Implied Warranty Claims (I-II)
1. Express Warranty
Plaintiff purchased defendant’s eggs through ECI, a commercial exchange. (FAC ¶ 79.) Plaintiff alleges all sellers using ECI are subject to an express warranty to comply with the FDA egg safety rule. (Id. ¶ 143.) After the FDA egg rule came into effect, plaintiff alleges ECI included clauses in its egg purchase confirmations requiring sellers to comply with FDA regulations concerning SE, including notifying ECI of positive SE tests, and to indemnify the Clearinghouse and its members for any damages incurred through failure to comply. (Id. ¶ 88.)
Defendant argues it made no express warranty to plaintiff about its eggs and it cannot be held to the affirmations of a third party. (ECF 70 at 9 (citing Grinnell v. Charles Pfizer & Co.,
The court finds plaintiffs warranty claim fails as a matter of law. There is no evidence that defendant, as the seller, made an affirmation. Neither party cites a case that speaks to whether a seller can be held to an affirmation made by a third party but contained in a purchase confirmation to which the seller was a party. Defendant cites Grinnell, which only generally restates the requirement that the seller make an affirmation.
2. Implied Warranties
Plaintiff also brings two implied warranty claims: implied warranty of merchantability and implied warranty of fitness. (FAC ¶¶ 130, 136.) Defendant argues plaintiff has failed to allege elements necessary to each claim. First, defendant avers plaintiff has failed to allege vertical privity, which is necessary to both implied warranty claims. (ECF 70 at 10.) Second, defendant asserts plaintiff has failed to allege reliance on defendant’s skill in selecting particular eggs, which is required to prove a breach of implied warranty of fitness. (Id.) Plaintiff counters that it sufficiently pled vertical privity and that defendant admitted such privity exists in its answer. (ECF 97 at 15.) Defendant does not respond to this argument in its reply. Additionally, plaintiff argues it has sufficiently pled facts supporting its implied warranty of fitness claim. (Id. at 16.) Specifically, plaintiff pled that defendant knew plaintiff would sell some of the eggs it purchased from defendant as unbroken shell eggs, which must be free of SE because they are not pasteurized before human consumption. (Id.)
i. Vertical Privity
To succeed in an implied warranty claim, a plaintiff must “stand in vertical contractual privity with the defendant.” Clemens v. DaimlerChrysler Corp.,
The warranty of fitness for a particular purpose is implied by law when “a seller has reason to know that a buyer wishes goods for a particular purpose and is relying on the seller’s skill and judgment to furnish those goods.” Martinez v. Metabolife Int’l, Inc.,
A “particular purpose” differs from the ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to the nature of his business whereas the ordinary purposes for which goods are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the goods in question. For example, shoes are generally used for the purpose of walking upon ordinary ground, but a seller may know that a particular pair was selected to be used for climbing mountains.
Cal. Comm.Code § 2315, comment 2. This comment also instructs that a contract may include both a warranty of merchantability and of fitness for a particular purpose. Id.
The court finds this claim is inadequately pled. Eggs such as those at issue here are ordinarily used for human consumption, whether as a processed and pasteurized liquid or as unbroken shell eggs. Plaintiff does not allege, nor could the court accept, that buying eggs to be repackaged and sold to consumers as unbroken shell eggs is “peculiar to the nature” of plaintiffs business. See, e.g., Mathison v. Bumbo, No. SA CV08-0369 DOC (Anx),
C. Plaintiffs Fraud and Unfair Competition Claims (IV and VIII)
Defendant avers plaintiffs fraud and unfair competition claims do not meet Federal Rule of Civil Procedure 9(b)’s (“Rule”) heightened pleading standard. (ECF 70 at 12-13.) Rule 9(b) requires a party to “state with particularity the circumstances constituting fraud or mistake” when a plaintiff is alleging fraud or mistake. Defendant further argues plaintiff, who is bringing a fraud claim against multiple defendants, must set forth the alleged conduct attributable to each defendant; “everyone did everything” allegations are insufficient. (Id. at 12 (citing Swartz v. KPMG, LLP,
Plaintiff argues its fraud allegations meet Rule 9(b)’s heightened standard. (ECF 97 at 17.) It contends defendant misapprehends Swartz’s assertion: plain
1. Plaintiffs Fraud Claim Satisfies Rule 9(b)
Plaintiff appears to allege two theories of fraud: intentional concealment/omission and intentional misrepresentation. (FAC ¶¶ 153-159.) When pleading common law fraud, Rule 9(b) requires “more specificity including an account of the ‘time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations.’” Swartz,
Plaintiff has met Rule 9(b)’s heightened pleading requirement. It alleges defendant’s manager, Tony Wasmund, discussed with others the ongoing SE problem at defendant’s farms on May 28, 2010. (FAC ¶¶ 43, 72-76.) Plaintiff sets out the content of these discussions in several pages of the FAC, in the form of quotations and other related details. (Id. ¶¶ 72-76.) Plaintiff then alleges defendant intentionally and knowingly concealed the SE contamination from plaintiff and regulators and continued to ship eggs to plaintiff as late as July 2010. (Id. ¶¶ 77, 80-83.) These allegations specifically name defendant Quality Egg, or sometimes “Wright County Egg,” whose orders from plaintiff, plaintiff alleges, were shipped to plaintiff directly from defendant. (Id. ¶¶ 80-83.) These allegations are sufficiently specific: they provide the time, place, specific content of defendant’s knowledge from which an omission can be inferred, and the identities of the parties to the misrepresentation. Swartz,
To the extent plaintiffs unfair competition claim is premised upon its fraud claim, the unfair competition claim is adequately pled because plaintiffs fraud claim satisfies Rule 9(b). To the extent plaintiffs claim is premised upon other violations of law, plaintiffs compliance with Rule 9(b) is irrelevant. Vess,
D. Leave to Amend
Courts should consider four factors when considering leave to amend: 1) undue delay; 2) bad faith; 3) futility of amendment; and 4) prejudice to the opposing party. Levine v. Safeguard Health Enterprises, Inc.,
However, the court finds the third factor weighs most heavily here: given the reasons for dismissing certain claims in whole or in part, the court finds amendment would be futile. Leave to amend is denied.
IV. CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss is GRANTED in part and DENIED in part, as follows:
1. Plaintiffs negligence claims (V and VII) may proceed only as to physical damage to other property, as described in this order;
2. Plaintiffs express warranty claim (III) and implied warranty of fitness claim (II) are dismissed with prejudice in their entirety; and
3. Leave to amend is denied.
The court further ORDERS that:
1. Plaintiff file amended pleadings consistent with this order by February 15,2013; and
2. The status conference set for February 21, 2013 is vacated and reset for March 7, 2013.
IT IS SO ORDERED.
Notes
. The complaint labels two claims as "seven.” This court identifies the second "seven” as the eighth claim.
. "The sprag clutch on a helicopter functions like the 'free wheeling' clutch mechanism on a bicycle where the rider transmits power to the rear wheel by operating the pedals, but when the rider stops pedaling, the wheel continues to rotate. A sprag clutch is primarily a safety mechanism. If a helicopter loses power during flight, the sprag clutch allows the rotor blades to continue turning and permits the pilot to maintain control and land safely by the 'autorotating' of the rotor blades.” Robinson,