Opinion
Civil File No. 99-2041 (MJD/JGL)
August 29, 2003
David D. Meyer, Fredrikson Byron, P.A., for and on behalf of Plaintiff
John E. Drawz, Fredrikson Byron, P.A. for and on behalf of Plaintiff
Jay A. Quam, Fredrikson Byron, P.A. for and on behalf of Plaintiff
Steven J. Quam, Fredrikson Byron, P.A. for and on behalf of Plaintiff
Richard A. Kempf, Maslon Edelman Borland Brand, LLP for and on behalf of Defendant
R. Christopher Sur, Maslon Edelman Borland Brand, LLP for and on behalf of Defendant
Elizabeth Poeschl, Maslon Edelman Borland Brand, LLP for and on behalf of Defendant
MEMORANDUM AND ORDER
I. INTRODUCTION
This matter is before the Court on Plaintiff's Motion for Partial Summary Judgment on Defendant's Counterclaims for: 1) breach of implied warranties; and 2) lost profits. The dispute between the parties arises from a Supply Agreement ("Agreement") executed in May 1999. In the underlying Complaint filed in this Court, Plaintiff alleges that Defendant breached the Supply Agreement by failing to order the required product amounts. Defendant filed an Answer and Counterclaim alleging: 1) breach of express warranties; 2) breach of implied warranties; 3) breach of contract; and 4) wrongful termination of the Agreement.
Plaintiff asserts that the Agreement disclaims all warranties and defines and limits the remedies for a breach of warranty claim. Defendant asserts that the warranty disclaimer is inconsistent with the express warranties provided by Plaintiff, and it is therefore inoperative under Minnesota law. Defendant also asserts that the limitation on remedies failed its essential purpose and is therefore ineffective.
II. BACKGROUND
A. The Parties
In 1998, Plaintiff Sparta Foods, Inc. ("Sparta") was a publicly traded Minnesota corporation engaged in the manufacture and sale of chips, tortillas and other food products. In 1998, Defendant Rupari Food Services, Inc. ("Rupari") was a Florida corporation engaged in the sale or distribution of various food products.
In June 2000, Cenex Harvest States purchased Sparta Foods.
B. Sparta Rupari Negotiate a Business Arrangement
In 1998, Sparta was in the process of developing and marketing a new product consisting of a snack food package containing a bag of tortilla chips and a cup of either nacho cheese sauce or salsa. Representatives of Sparta and Rupari met at the National Association of Convenience Stores ("NACS") trade show in Georgia. Following the NACS trade show, representatives of Sparta flew to Florida in late 1998 to meet with representatives from Rupari to discuss a possible business relationship regarding the new product. During a January 1999 meeting, the parties signed a handwritten letter of intent to do business.
The letter of intent set forth the parameters of the business relationship by which Sparta would manufacture the product and sell it to Rupari for distribution. Rupari developed the brand, Banditos, which would be owned by Rupari. The letter of intent also provided that Rupari would place an initial order of at least 2 million packages of the product at a price of $0.84 per package.
Prior to Sparta's contact with Rupari, Sparta had contacted Hoffman Aseptic Packaging Co. ("Hoffman") to manufacture the cheese cups. Sparta had already begun to create samples. Sparta intended to go forward with developing and marketing the snack food product before it even met Rupari. Thus, Sparta had initial samples available for Rupari when the parties began negotiations, and provided them to Rupari for approval. Hoffman did an initial run of cheese cups in late February and early March of 1999, of which Sparta sent samples to Rupari for approval of taste, color, odor, and other qualities. Robert Mintz ("Mintz"), then CEO of Rupari, personally approved the cheese cups.
C. The Supply Agreement
Negotiations regarding the Agreement were protracted, with counsel for each corporation exchanging numerous drafts. Nonetheless the final version was executed in May 1999, and had an effective date of January 14, 1999. Rupari contends that by the time it was signed, various provisions were ambiguous. Notably Sparta points out that paragraph 4.2 of the Agreement required Rupari to make an initial purchase of 2 million packages of the Banditos product, while Rupari asserts that by the time the Agreement was signed, there already had been a number of orders, none of which were for 2 million packages. Rupari goes on to assert that Joel Bachul ("Bachul"), Sparta's then president, acknowledged that the initial order requirement was a logical impossibility. At no point did Rupari place an order for 2 million packages of Banditos.
Paragraph 7.2 of the Agreement contains the warranty provisions, as guaranteed by Sparta, and provides:
By Sparta. Sparta warrants to Rupari that the Products sold under this Agreement shall be manufactured in accordance with the Specifications and shall be merchantable in accordance with FDA standards at the time and point of delivery.The exclusive remedy for breach of such warranty shall be, at Sparta's option, to either (i) replace the defective Product or (ii) refund the purchase price of the defective Product paid by Rupari.Rupari shall promptly notify Sparta in writing of any alleged breaches of this warranty.Rupari shall not return to Sparta any alleged defective Product, or take any credits against its Product invoices for such alleged defective product, without the prior written authorization of Sparta. EXCEPT AS EXPRESSLY PROVIDED ABOVE, SPARTA MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS, WHETHER AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, WARRANTIES ARISING FROM COURSE OR [sic] DEALING OR ANY OTHER MATTER. No employee or representative of Sparta shall have any authority to bind Sparta to any warranty representation except as expressly stated above. Rupari shall be exclusively responsible for any warranty or representation Rupari makes to any customer. Notwithstanding the above disclaimers, Sparta agrees to indemnify and hold Rupari harmless from and against any and all third party claims . . . and any liabilities, damages, costs and expenses . . . resulting therefrom which Rupari may suffer or incur relating to or arising out of, directly or indirectly, (i) use of the Specifications supplied by Sparta for the Products, or (ii) use or consumption of any of the Products to the extent arising from (A) a breach of the above warranty or (B) any other manufacturing defect in the Product or any negligent or intentional act or omissions of Sparta or its employees. Nothing in this paragraph shall be interpreted to limit Sparta's liability as manufacturer of the Product to third party consumers.
D. Sales and Marketing of the Banditos Product
The parties continued to market and sell Banditos through August 1999, apparently without any problems, although Sparta emphasizes that Rupari still had not placed an order for 2 million packages. During August 1999, Banditos were featured at Sam's Clubs, a nationally prominent retailer.
In September 1999, at a time when Sam's Club, K-Mart, and other national retailers were considering whether to carry Banditos, Rupari began to receive complaints about the about the appearance and flavor of the nacho cheese sauce. Sparta tested samples from its library and informed Rupari that it had witnessed no problem with the cheese. Rupari asserts that Sparta wrote to Hoffman, without informing Rupari, regarding the complaints. In this communication, Sparta stated that it originally thought it had isolated the problem to a few pallets, but discovered that the problems seemed "to be throughout all the product [Hoffman had] produced." Sparta also stated that they needed to know "why the cheese color [was] changing on a day-to-day basis."
Hoffman responded that its tests indicated that the cheese remained aseptically sealed and was not a threat to health, although there had been some color change. It was Hoffman's opinion that the change was the result of storage temperature and time. Hoffman stated that a shelf life of six months was normal and that these products were now eight months old. Hoffman concluded that a delayed start of sales was at the root of the problem. Rupari asserts that Sparta denied to Rupari that there was anything wrong with the product.
On October 11, 1999, Sparta sent Rupari a letter stating that Rupari was currently in default of several provisions of the Agreement. However, the letter also reaffirmed Sparta's intent to continue developing the Banditos product. On October 19, 1999, Rupari sent Sparta a letter stating that they could no longer use the cheese cups made by Hoffman dues to numerous customer and buyer complaints. Rupari asked Sparta to find a new supplier, from which Rupari would purchase the cheese cups directly. Sparta asserts that Rupari did not identify the nature of the complaints, allege that Sparta had breached the warranty contained in the Agreement, demand that Sparta replace the cups that were allegedly defective, or seek a refund of the amounts paid for those cups.
Rupari asserts that Sparta continued to deny that there was anything wrong with the product, despite having produced a "Cheese Production Quality Recap" on October 18, 1999, in which it described the discolored cheese as "Non Saleable." On October 20, 1999, Sparta sent a letter to Rupari simply stating that Sparta expected Rupari to help it move the existing cheese cups. Rupari asserts that Sparta never replaced the cheese cups, nor did it offer to refund the purchase price of the cheese cups.
On November 18, 1999, counsel for Sparta sent Rupari a letter formally putting it on notice that Rupari was in breach of the Agreement pursuant to paragraph 10.1. Sparta specifically indicated that Rupari had failed to place its initial order of 2 million packages and it had become delinquent on amounts it owed Sparta under the Agreement.
Rupari claims that Sparta continued to complain to Hoffman, all the while denying that there was a problem with the product. Rupari further alleges that on December 9, 1999, Sparta informed Hoffman that it was revoking its acceptance of the cheese cups because they did not meet specifications.
III. DISCUSSION
A. Legal Standard
Summary judgment is appropriate 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); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Unigroup, Inc. v. O'Rourke Storage Transfer Co., 980 F.2d 1217, 1219-20 (8th Cir. 1992). The nonmoving party must demonstrate the existence of specific facts in the record that create a genuine issue for trial. See 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. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986);Krenik, 47 F.3d at 957. The Court must view the evidence, and the inferences that may be reasonably drawn from the evidence, in the light most favorable to the nonmoving party. See Enter. Bank v. Magna Bank, 92 F.3d 743, 747(8th Cir. 1996). However, "summary 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 designated to secure the just, speedy, and inexpensive determination of every action." Celotex, 477 U.S. at 327 (quotation omitted).
B. The Breach of Warranty Claims
The parties do not dispute that this matter is controlled by the Uniform Commercial Code ("UCC"). See Transp. Corp. of America, Inc. v. IBM, Inc., 30 F.3d 953, 959-60 (8th Cir. 1994). In a transaction involving sophisticated parties, one of the paramount concerns of the UCC is to enable them to control their own relationships and allocation of risk. See e.g., East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 872-733 (1986).
Minnesota law permits contracting parties to disclaim warranties. See Minn. Stat. § 336.2-316, subd. 2. Such a disclaimer regarding merchantability is valid if it mentions the word "merchantability" and is conspicuous. See id. Capitalization, typeface and location of the clause play a part in determining whether such a disclaimer is conspicuous. See Agristor Leasing v. Guggisberg, 617 F. Supp. 902, 909 (D. Minn. 1985).
Sparta points to the fact that the disclaimer in paragraph 7.2 is entirely capitalized and contains the word "merchantability". Sparta asserts that on its face there can be no question that it properly disclaimed the warranties. See Dubbe v. A.O. Smith Harvestore Products, 399 N.W.2d 644, 647 (Minn.Ct.App. 1987) (holding that capitalized large print disclaimer that mentions "merchantability" was valid).
Rupari responds that factual issues exist with respect to the creation of conflicting express warranties. Rupari asserts that a conflict between the warranty disclaimer and Sparta's express warranties operate to render the disclaimer provision inoperative. Rupari points to the preceding provision Minn. Stat. § 336.2-316, which states that "[w]ords or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other, but . . . negation or limitation is inoperative to the extent that such construction is unreasonable." Minn. Stat. § 336.2-316, subd. 1.
Rupari asserts that Sparta made several express warranties in the Agreement under paragraph 7.2, and by sending samples to Rupari. See Minn. Stat. § 336.2-313, subd. (c) (stating that any sample made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample). Rupari contends that Sparta made express warranties relating to merchantability, fitness for a particular purpose and course of dealing, and that Sparta's attempted disclaimer of implied warranties of merchantability and fitness conflict with Sparta's express warranties. Rupari asserts that there is no way to consistently read the disclaimer of implied warranties with the express warranties, and therefore the disclaimer is invalid. See Northern States Power Co. v. ITT Meyer Indus., 777 F.2d 405, 408 (8th Cir. 1985); Wenner v. Gulf Oil, 264 N.W.2d 374, 384 (Minn. 1978).
Rupari argues that, at a minimum, whether express warranties were created and breached, are questions for a jury to decide. See SCM Corp. v. Deltak Corp., 702 F. Supp. 1428, 1435 (D. Minn. 1988). Rupari contends that Sparta's warranty that the product would match the specifications is ambiguous because it is unclear whether Sparta ever sent Rupari any written specifications.
The Court agrees with Sparta that it successfully disclaimed warranties via the disclaimer provision in paragraph 7.2. Nonetheless, disputed issues of material fact exist as to whether conflicting express warranties were created under paragraph 7.2, or by Sparta's delivery of samples to Rupari. These factual disputes preclude the Court from granting Sparta's motion with respect to Rupari's breach of warranty claims.
C. Rupari's Remedy
The UCC, as adopted in Minnesota, allows parties to modify or limit their remedies that would otherwise be available for a breach of contract. See Minn. Stat. § 336.2-719, subd. 1(a). If such a limited remedy is expressly agreed to be exclusive, then it is the sole remedy. Id., subd. 1(b). The only exception to such a limitation is where an agreed upon remedy "fails of its essential purpose." Id., subd. 2. Limitations fail of their essential purpose where "circumstances arise to deprive the limiting clause of its meaning or one party of the substantial [benefit] of its bargain." Transp. Corp., 30 F.3d at 959;Durfee v. Rod Baxter Imports, Inc., 262 N.W.2d 349, 356 (Minn. 1977).
As long as the seller replaces the goods each time there is a defect, such a remedy clause does not fail its essential purpose, but if replacements are not made within a reasonable time, the buyer may be deprived of the benefits of the exclusive remedy. See id. However, just because a remedy does not adequately cover a party's losses does not mean that it fails of its essential purpose. See Taylor Investment Corp. v. Weil, 169 F. Supp.2d 1046, 1059 (D. Minn. 2001).
Sparta points to the fact that the parties in this matter are sophisticated commercial entities who were assisted by counsel in drafting the Agreement. Sparta asserts that the Agreement clearly expresses the parties' negotiated allocation of risk by limiting Rupari's damages to replacement of the product or a refund of the purchase price. Sparta argues that given the position of the nature of the parties and the negotiated Agreement, that the Court should enforce its terms.
Rupari, on the other hand, argues that Sparta refused to replace the defective cheese cups or refund the purchase price. Rupari points to its October 19, 1999, letter as the trigger for Sparta's obligations under the Agreement. Rupari contends that rather than replace or refund, Sparta continued to maintain that there was no problem with the cheese cups, while demanding that Hoffman reimburse Sparta for a the defective product. Rupari also alleges that Sparta actively concealed its correspondence with Hoffman regarding the cheese cups. Rupari concludes that Sparta's refusal to comply with the terms of the remedy provision rendered it meaningless. Rupari characterizes Sparta's actions as "willful non-compliance with its contractual obligations," and asserts that Sparta may not now rely on limitations that it previously ignored. See Soo Line RR v. Fruehauf Corp., 547 F.2d 1365, 1370 (8th Cir. 1977).
Disputed issues of material fact exist as to whether Sparta had an obligation to replace the cheese cups, and if so, whether Sparta met its obligation. These factual disputes preclude the Court from granting Sparta's motion with respect to Rupari's lost profits claim.
Accordingly, based upon the files, records, and proceedings herein, IT IS HEREBY ORDERED that Plaintiff's Motion for Partial Summary Judgment is
DENIED.