Opinion
Civil No. 02-1141 (DWF/SRN)
January 16, 2004
Charles A. Bird, Esq., Bird Jacobsen, Rochester, Minnesota, of counsel for Plaintiff
William D. Mahler, Esq., Mahler Law Office, Rochester, Minnesota, of counsel for Plaintiff
Mark J. Carpenter, Esq., and Allan A. Thoen, Esq., Faegre Benson, Minneapolis, MN, of counsel for Defendant
MEMORANDUM OPINION AND ORDER
Introduction
The above-entitled matter came on for hearing before the undersigned United States District Judge on December 5, 2003, pursuant to Plaintiff Kalmes Farms, Inc.'s ("Kalmes Farms") Motion for Partial Summary Judgment and Defendant J-Star Industries' ("JSI") Motion for Summary Judgment. For the reasons stated below, the Court grants in part, and denies in part both Kalmes Farms' Motion for Partial Summary Judgment and J-Star's Motion for Summary Judgment.
Background
Plaintiff Kalmes Farms owns and operates a dairy farm in Winona County, Minnesota. Until 2002, Defendant JSI manufactured and distributed agricultural equipment, including the Bottom Unloading Conversion System ("BUGS") and the Big Jim Quantum top unloader ("BJQ"). Kreofsky Building Supply ("KBS") was an authorized agent of JSI selling products such as the BUGS and BJQ unloaders.
Kalmes Farms is fairly average-sized for a southeastern Minnesota dairy operation. In the 1970s, Eugene Kalmes incorporated the family farm. In 1989, Eugene Kalmes' son, Robert Kalmes, took over the farm from his father. Kalmes Farms consists of 345 acres of tillable land and somewhere between 200 and 250 cattle. Kalmes Farms appears to have had no more than five employees at any given time during its existence.
In 1993, Robert Kalmes purchased a BUCS unloader from KBS for use in Kalmes Farms' Harvestore silo. The BUGS unloader was designed to allow farmers to convert their Harvestore silos into a top-unloading silo. A top-unloading silo allows for better compaction and fermentation of feed.
About two months after the sale of the BUCS unloader, JSI delivered an owner's manual for the BUGS unloader to Kalmes Farms. Page four of the BUCS owner's manual contains a limited warranty. The limited warranty is divided into two sections. The first section, titled "Guarantee," provides that JSI will repair or replace any defects in material or workmanship for a period of one year for the product. The second section is titled "Exclusion Of Other Warranties And Remedies." The exclusion disclaims all express or implied warranties and limits damages solely to those contained in the guarantee. Specifically excluded by the exclusion are "any incidental, special, indirect or consequential damages for lost profits, lost sales, injury to persons or property, or any other loss." The exclusion sets forth the disclaimer of warranties and the limitations on damages in capital lettering and bold print.
In 1998, Robert Kalmes decided to replace the BUCS unloader because of problems he was experiencing with it. Kalmes heard that JSI had introduced a new model of unloader to replace the BUCS unloader. In the spring of 1998, Kalmes spoke with KBS about obtaining the new BJQ unloader. Because KBS was unable to answer all of Kalmes' questions regarding the BJQ, Kalmes was put in touch with JSI's territory manager, Steve Gehrke.
While speaking with a KBS representative and Gehrke, Kalmes was shown a JSI sales brochure for the BJQ. Kalmes asserts that the KBS representative and Gehrke repeated representations made in the sales brochure, including: BJQ's ability to provide better feed compaction and better quality feed, faster filling, faster unloading, and lower maintenance costs. Kalmes asserts that, based on the representations contained in the BJQ's brochure and those representations made by the KBS representative and Gehrke, he executed a letter agreement on behalf of Kalmes Farms for the replacement of the BUCS unloader with a BJQ unloader. The letter agreement outlined the terms of the purchase, stating that "[t]he standard one-year J-Star warranty will apply on all new components," and also states that, by signing the agreement, the owner understands that the product will require "normal maintenance and adjustment for proper operation, all of which is described in the Operator's Manual supplied with the new unloader." The BJQ was installed at Kalmes Farms on May 19 and 20, 1998. The BJQ's owner's manual was delivered to Kalmes Farms on July 15, 1998.
Kalmes experienced a number of mechanical problems with the BJQ after it was installed. KBS was called to Kalmes' Farm many times to repair the BJQ. In addition to the mechanical problems with the BJQ, Kalmes asserts the BJQ caused significant damage to the feed. Kalmes Farms' suit asserts that the damage to the feed resulting from the use of the BJQ injured the cattle that ate the feed, thus causing considerable economic loss.
Discussion
1. Standard of ReviewSummary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must view the evidence and the inference that may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enter. Bank v. Magna Bank of Missouri, 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has stated, "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy, and inexpensive determination of every action.'" Celotex Corp v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed.R.Civ.P. 1).
The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enter. Bank, 92 F.3d at 747. The nonmoving party must demonstrate the existence of specific facts in the record that create a genuine issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Krenik, 47 F.3d at 957.
2. Minnesota's Economic Loss Doctrine
The economic loss doctrine was first fully articulated by the Minnesota courts in the 1981 case of Superwood Corp. v. Siempelkamp Corp., 311 N.W.2d 159 (Minn. 1981). The essence of the economic loss doctrine as pronounced in Superwood was that "[E]conomic losses that arise out of commercial transactions, except those involving personal injury or damage to other property, are not recoverable under the tort theories of negligence or strict products liability." Id. at 162. The rationale for the economic loss doctrine was that "to allow tort liability in commercial transactions would totally emasculate" provisions of the Uniform Commercial Code ("UCC"). Id. The economic loss doctrine remained largely unchanged by statute or case law until 1990. In 1990, the Minnesota Supreme Court overruled the "damage to other property" exception to the economic loss doctrine. Hapka v. Pacquin Farms, 458 N.W.2d 683 (Minn. 1990).
In 1991, the Minnesota Legislature responded, at least in part, to the Hapka ruling by codifying its own version of the economic loss doctrine. See Marvin Lumber and Cedar Co. v. PPG Industries, Inc., 34 F. Supp.2d 738, 743 (D. Minn. 1999), affirmed in part and reversed in part, 223 F.3d 873 (8th Cir. 2000). Minnesota Statute § 604.10 provides:
(a) Economic loss that arises from a sale of goods that is due to damage to tangible property other than the goods sold may be recovered in tort as well as in contract, but economic loss that arises from a sale of goods between parties who are each merchants in goods of the kind is not recoverable in tort.
(b) Economic loss that arises from a sale of goods, between merchants, that is not due to damage to tangible property other than the goods sold may be recovered in tort.
(c) The economic loss recoverable in tort under this section does not include economic loss due to damage to the goods themselves.
(d) The economic loss recoverable in tort under this section does not include economic loss incurred by a manufacturer of goods arising from damage to the manufactured goods and caused by a component of the goods.
(e) This section shall not be interpreted to bar tort causes of action based upon fraud or fraudulent or intentional misrepresentation or limit remedies for those actions.A. Waiver of the Economic Loss Doctrine as a Defense
Kalmes Farms asserts that JSI waived any defense it may have under the economic loss doctrine for failure to adequately plead it as an affirmative defense. JSI asserts that it did not waive the economic loss doctrine as a defense, because the economic loss doctrine is not an affirmative defense. JSI asserts that even if the Court finds that the economic loss doctrine is an affirmative defense, JSI will prevail on this issue because the economic loss doctrine was properly pled and Kalmes Farms can show no prejudice to it being asserted at this time. Without considering whether the economic loss doctrine is or is not an affirmative defense, the Court finds that under the liberal notice pleading standards of the federal courts, JSI's statement that "the damages Plaintiff may recover are limited and controlled by the provisions of the Uniform Commercial Code" is sufficient to put Kalmes Farms on notice of the doctrine being asserted as a defense in this matter.
B. Section 604.10(a) — Transactions "Between Merchants in Goods of the Kind"
JSI initially asserted that Kalmes Farms was a "merchant in goods of the kind" as the term is defined under § 604.10(a). The Eighth Circuit recently adopted a narrower definition of the term merchant in goods of the kind in its Holden Farms, Inc. v. Hog Slat, Inc. decision. 347 F.3d 1055 (8th Cir. 2003). Under the Eighth Circuit's decision in Holden Farms, a party is a merchant in goods of the kind only if the party is a dealer in the specific type of goods at issue. See id.; see also Jennie-O Foods, Inc. v. Safe-Glo Products Corp., 582 N.W.2d 576 (Minn.Ct.App. 1998). Based on this narrower definition of merchant in goods of the kind, JSI has wisely chosen to back away from this argument. Because JSI has not completely conceded its argument that Kalmes Farms is a merchant in goods of the kind, and for the sake of the record's clarity, the Court finds that Kalmes Farms is not a merchant in goods of the kind with regard to grain silos.
C. Section 604.10(b)
i. Transaction "Between Merchants"
The word merchant is defined in Minnesota Statute § 336.2-104(1):
"Merchant" means a person who deals in goods of the kind or otherwise by occupation holds out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by employment of an agent or broker or other intermediary who by occupation holds out as having such knowledge or skill.
JSI asserts that a "near-avalanche" of cases hold that farmers act as merchants when they purchase equipment and inputs used in commercial farming operations. The cases cited by JSI rely on findings that the farmers are "merchants" for purposes of § 604.10(a), Hector Farms v. American Cynamid Co., 1992 WL 421343, 18 U.C.C. Rep. Serv.2d 1083 (D. Minn.) (holding farmers to be merchants for purposes of § 604.10(a) when they purchase pesticide), or upon the pre-statutory criterion that the farmers are engaged in "commercial transactions." See Holstad v. Southwestern Porcelain, Inc., 421 N.W.2d 371, 375 (Minn.Ct.App. 1988) (holding farmers could not recover for "loss of feed and decreased milk production" caused by an allegedly defective silo); see also Nelson v. Int'l Harvester Corp., 394 N.W.2d 578, 581 (Minn.Ct.App. 1986), overruled on other grounds, Lloyd F. Smith Co., Inc. v. Den-Tal-Ez, Inc., 491 N.W.2d 11, 17 (Minn. 1992) (holding that a farmer's purchase of farm machinery is a commercial transaction within the meaning of the Superwood decision).
Kalmes Farms points out that the vast majority of the cases cited by JSI were decided before § 604.10 was adopted by the Minnesota Legislature. Kalmes Farms asserts that cases decided prior to the adoption of the statute are less relevant because the consumer versus commercial transaction test that was used by the courts prior to the adoption of the statute considered both the "knowledge" and "equal bargaining power" of the parties, whereas the statutory definition of merchant relevant to this case focuses entirely on the knowledge or skill of the individual in dealing with certain goods. Kalmes Farms argues that, here, it is not a merchant because it neither deals in silo unloaders or has any "knowledge or skill peculiar to the . . . goods involved in the transaction." Minn. Stat. § 336.2-104(1). In support of this contention, Kalmes Farms asserts that it is a fairly small farming operation run substantially by a single person with no particular knowledge or skill in the field of silos or silo unloaders.
Based on an extensive review of the case law developed in this area and the facts of this case, the Court finds that Kalmes Farms is not a merchant as the term is used in § 604.10(b). The Court agrees with Kalmes Farms that the "commercial transaction" test used prior to the adoption of § 604.10 by courts to determine whether a party would be allowed to sue in tort focused on a factor that is not considered by courts today when they determine whether a party to a transaction was a merchant, namely, the bargaining power of the parties. In looking at the cases cited by JSI that were decided prior to § 604.10, it is clear that the "commercial transaction" test played an important role in the courts reaching those decisions. As a result, the Court finds that the cases decided prior to the adoption of § 604.10 are less relevant in guiding this Court's decision.
The Court also finds that the only case cited by JSI that was decided after the statute was adopted is easily distinguishable from the case at bar based on its facts. In Hector Farms v. American Cynamid Co., 1992 WL 421343, 18 U.C.C. Rep. Serv.2d 1083 (D. Minn.), another federal court in this district determined that a farming partnership's claims were barred under the economic loss doctrine for losses allegedly due to changes in the rotational crop restrictions of a herbicide purchased by the farming partnership. The Court finds that the comparative size of the operation in Hector Farms and in the case at bar and the comparative quality and quantity of the transactions involved in the two cases are of great importance. Kalmes Farms consists of 345 acres of tillable land whereas Hector Farms is roughly 40 times larger with over 12,500 acres of tillable land in Minnesota. While the Court does not believe the size of the operation is the most accurate indicia of the relative knowledgeableness of the operations, the Court believes that an operation the size of Hector Farms is far more likely to have an individual or group of people specifically involved in purchasing.
The Court also finds that the quality and quantity of the transactions at issue are relevant in determining whether a party is a merchant. Kalmes Farms has purchased 2 silo unloaders from JSI over a span of 5 years. In contrast, Hector Farms purchased 631 gallons of the herbicide at issue in the case in one year alone. In fact, Hector Farms purchased over $475,000 in agricultural chemicals from eight different manufacturers the year before it purchased the herbicide in question. Hector Farms' purchases of herbicide and other agricultural chemicals occurred in vast quantities, from a variety of manufacturers, over a number of years. Kalmes Farms' purchase of silos did not. Based on the facts of this case, the Court finds that Kalmes Farms is not a merchant as the term is defined under Minnesota Statute § 336.2-104(1). Therefore, Kalmes Farms is not barred from recovery by Minnesota's economic loss doctrine.
D. Negligent Misrepresentation
JSI asserts that § 604.10(e) bars any negligent misrepresentation claims brought by Kalmes Farms. Section 604.10(e) provides that the economic loss doctrine's general rule preventing tort recovery shall not bar "fraud or fraudulent or intentional misrepresentation" claims. JSI asserts that fraud and negligence are different torts and that "fraud is distinguished from negligence by the element of scienter required." Florenzano v. Olson, 387 N.W.2d 168, 173 (Minn. 1986). JSI asserts that if the Minnesota Legislature had wanted to allow claims for negligent misrepresentation to be brought forward, it would have included specific language towards that end in the statute. Kalmes Farms, on the other hand, asserts that "fraud, in its broadest form, can be understood to encompass actions that result from both deceit and negligence." Florenzano, 387 N.W.2d at 173.
The Court finds that § 604.10(e) does not bar Kalmes Farms' negligent misrepresentation claims. In Minnesota, fraud has been defined to include intentional, reckless, and negligent misrepresentations. See Williams v. Tweed, 520 N.W.2d 515, 517 (Minn.Ct.App. 1994) (citing Florenzano, 387 N.W.2d at 177 (Simonett, J., concurring specially)). The Minnesota Legislature is aware of the many derivations of fraud in Minnesota and has shown an ability to exclude certain types of misrepresentation claims when it intends to do so. See Minn. Stat. § 604.101, subd. 4 (barring common law misrepresentation claims in certain instances "unless the misrepresentation was made intentionally or recklessly.") Here, knowing these derivations of fraud, the Legislature chose to use the general term "fraud" in its list of exceptions from the tort liability bar of § 604.10. Thus, the Court is only left to conclude that the Legislature intentionally meant to except all types of fraud. Based on the reasons stated above, the Court finds that § 604.10(e) does not bar Kalmes Farms' negligent misrepresentation claims.
3. Consumer Protection Claims
JSI seeks dismissal of Kalmes Farms' claims under Minnesota's Consumer Fraud Act ("CFA"), Minn. Stat. § 325 F.69, and the False Advertising Act ("FAA"), Minn. Stat. § 325 F.67. Neither of these acts provide a private right of action to individual consumers. However, individuals may pursue private remedies under the Private Attorney General Act, Minn. Stat. § 8.31. An individual that pursues a claim as a "private" attorney general must assume the role and duties of the attorney general position as it relates to the enforcement of the law. See Ly v. Nystrom, 615 N.W.2d 302, 313 (Minn. 2000). Therefore, individuals that bring suits pursuant to the statute must demonstrate that the suit is brought to benefit the public. Id. at 314.
JSI asserts that Kalmes Farms' claims under the CFA and FAA must be dismissed because the claims were not brought for the public's benefit. In support of this contention, JSI asserts that the product at issue in this case is no longer being manufactured and the advertising used to support that product is likewise no longer being used. JSI also asserts that Kalmes Farms is seeking to recover only money damages for its own benefit rather than injunctive relief. Kalmes Farms contends that the advertising materials at issue in this case were held out to the public at large and that the plain language of the Private Attorney General Act clearly contemplates an individual bringing suit to recover only money damages.
The Court finds that summary judgment is appropriate on Kalmes Farms' claims under the CFA and FAA. While the allegedly false advertising was presented to the public at large, the advertising and the product it sought to promote are no longer in production. The Court also finds that Kalmes Farms' decision to seek only money damages is persuasive in determining whether the suit was brought for the benefit of the public. Based on the reasons stated above, the Court grants summary judgment to JSI on Kalmes Farms' claims under the CFA and FAA.
4. Contract Claims
A. Repair or Replacement Warranty
JSI asserts that Kalmes Farms' recovery is limited to repair or replacement of the defective parts in the BJQ unloader under the terms of the letter agreement. JSI begins its argument by pointing to language contained in the letter agreement that states: "The standard one-year J-Star warranty will apply on all new components." JSI asserts this language refers to the warranty contained in both the BUCS and BJQ manuals that also disclaimed all implied warranties and limited the remedies for breach of warranty to repair and replacement of defective goods. Kalmes Farms, on the other hand, contends that the language of the letter agreement clearly provided Kalmes Farms with a one-year guarantee on the BUCS unloader, but did not disclaim any warranties or limit Kalmes Farms' remedies in any way.
JSI then asserts that even if the plain language of the letter agreement was not sufficient to put Kalmes Farms on notice of the terms of the warranty, the prior dealings between the parties and the fact that the same warranty terms were present in the BUCS unloader's manual provided Kalmes Farms with sufficient notice of the warranty's terms. Kalmes Farms contends that there was no prior course of dealing or course of performance that would support a change in the terms of the letter agreement.
In addition, Kalmes Farms has provided the Court with a number of reasons why any disclaimer of warranties or limitation of damages would be unenforceable in this case. Specifically, Kalmes Farms asserts the disclaimer of remedies and limitations of damages were not made at the time of sale. Kalmes Farms also asserts that the disclaimer of remedies and limitations on damages are not enforceable because they were not conspicuous as required by Minnesota law and they conflicted with express warranties present in JSI's advertising. Finally, Kalmes Farms argues that the repair and replacement warranty fails of its essential purpose.
The Court finds that Kalmes Farms is not limited in its recovery to the repair or replacement costs of the allegedly defective parts of the BJG unloader. The Court arrives at this conclusion by finding that the language of the letter agreement does not reference anything more than a guarantee that JSI will repair or replace defective parts on the BJG unloader for a period of one year. The Court also finds that no prior course of dealing or performance existed between Kalmes Farms and JSI, because the record establishes only one prior transaction between the parties. Finally, the Court finds that the disclaimer of remedies and limitations of damages were not provided to Kalmes Farms until well after the sale took place and therefore are ineffective as a matter of law. See Douggall v. Brown Bay Boat Works Sales, Inc., 178 N.W.2d 217, 222-23 (Minn. 1970). Based on the reasons stated above, the Court finds that Kalmes Farms is not limited in its recovery to the repair or replacement costs of the allegedly defective parts of the BJG unloader.
B. Adequate Notice Of Breach
Kalmes Farms raised a number of additional issues in its Motion for Partial Summary Judgment. JSI responded to those issues that it contested and stated that it would not be pursuing certain affirmative defenses set out in its Answer including the defense of estoppel and the defense JSI raised based on Kalmes Farms' alleged "failure to timely reject the goods." The only remaining issue raised by Kalmes Farms and contested by JSI is whether Kalmes Farms is entitled to summary judgment on JSI's defense that Kalmes Farms did not give JSI adequate notice of its warranty claim.
The UCC, as adopted by Minnesota, states that where tender has been accepted, "the buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy." Minn. Stat. § 336.2-607(3)(a). The Minnesota Supreme Court has identified three purposes behind the notice provision found in Minn. Stat. § 336.2-607: (1) to provide the seller with an opportunity to correct the defect (a particularly compelling purpose where, as here, the sales contract limits the buyer's remedy to repair or replacement); (2) to provide the seller with an opportunity to prepare for negotiation and litigation; and (3) to provide the seller with an opportunity to investigate the claims independently while the merchandise remains in a relatively pristine state. See Church of the Nativity of Our Lord v. WatPro, Inc., 491 N.W.2d 1, 5 (Minn. 1992), overruled on other grounds, Ly, 615 N.W.2d at 314 n. 25.
The sufficiency of notice of breach of warranty is a jury question. See Northern States Power Co. v. ITT Meyer Indus., Div. of ITT Grinnell Corp., 777 F.2d 405, 408 (8th Cir. 1985). To be sufficient, notice "need only be such that informs the seller that the transaction is troublesome and needs to be watched." See id. at 408-09 (citations omitted). The notice requirement is not meant to act as a "technical procedural barrier," but is meant to be considered by the jury on the facts and circumstances of the case. See Watpro, 491 N.W.2d at 5 (citation omitted).
Kalmes Farms asserts it is entitled to summary judgment on the issue because it has produced evidence that it put JSI on notice of mechanical defects in the BJQ unloader. Kalmes Farms contacted KBS and JSI on a number of occasions regarding repairs that needed to be made to the BJQ unloader. JSI asserts that summary judgment on the issue of adequate notice is not appropriate, because each mechanical problem reported by Kalmes Farms to KBS or JSI was taken care of in an appropriate manner. In addition, JSI asserts that even if Kalmes Farms put JSI on notice of the mechanical problems with the BJQ unloader, Kalmes Farms never put JSI on notice of the feed-spoilage problems Kalmes Farms was having with the product.
The Court finds that fact issues remain regarding whether adequate notice of breach was communicated to JSI by Kalmes Farms. While the Court does not find merit in JSI's assertion that it needed to be notified of the feed-spoilage problem specifically, it does find that the record establishes that Kalmes Farms notified JSI and KBS multiple times of problems it was having with the BJQ unloader. However, the record is also clear that each time a complaint was received about the product, KBS made repairs to the product. The Court finds that fact issues remain as to the adequacy of Kalmes Farms' notice of breach. Therefore, the portion of Kalmes Farms' Motion for Partial Summary Judgment devoted to this issue is denied.
Conclusion
For the reasons stated, IT IS HEREBY ORDERED:
1. Plaintiff Kalmes Farms' Motion for Partial Summary Judgment (Doc. No. 37) is GRANTED IN PART and DENIED IN PART, as follows:
a. Kalmes Farms' Motion for Summary Judgment as to the defense of estoppel is GRANTED;
b. Kalmes Farms' Motion for Summary Judgment as to any statutes of limitations set out in the warranty is GRANTED;
c. Kalmes Farms' Motion for Summary Judgment as to any defense that its claims are barred by the limited warranty is GRANTED;
d. Kalmes Farms' Motion for Summary Judgment as to the defense that its claims are barred by an alleged failure to timely reject the goods or failure to revoke the goods is GRANTED;
e. Kalmes Farms' Motion for Summary Judgment as to the defense that its claims are barred by the economic loss doctrine is GRANTED;
f. Kalmes Farms' Motion for Summary Judgment as to the defense that its claims are barred by an alleged failure to provide adequate notice of breach is DENIED.
2. Defendant JSI's Motion for Summary Judgment (Doc. No. 27) is GRANTED IN PART and DENIED IN PART, as follows:
a. JSI's Motion for Summary Judgment applying the economic loss doctrine to bar Plaintiff's claims is DENIED;
b. JSI's Motion for Summary Judgment on the Consumer Fraud Act and False Advertising Act claims is GRANTED;
c. JSI's Motion for Summary Judgment regarding the effective disclaimer of all implied warranties and limited remedies for breach of warranty is DENIED.