Promotion in Motion, Inc. v. Beech-Nut Nutrition Corp.

Promotion in Motion, Inc.

v.Beech-Nut Nutrition Corporation

Civ. No. 09-1228 (WJM)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

December 20, 2011

WILLIAM J. MARTINI

JUDGE

LETTER OPINION

William D. Wallach

McCarter & English, LLP

(Attorney for Plaintiffs Promotion in Motion, Inc. and PIM Brands, LLC)

Paul J. Dillon

Bloom Karinja & Dillon, P.C.

(Attorney for Defendant Beech-Nut Nutrition Corporation)

Dear Counsel:

This matter comes before the Court on Defendant/Counter-Claimant Beech-Nut Nutrition Corporation's ("Beech-Nut's") motion for summary judgment. Plaintiffs Promotion in Motion, Inc. and PIM Brands LLC's (hereinafter, collectively "PIM") oppose the motion. For the reasons stated below, Defendant's motion is GRANTED in part and DENIED in part.

I. BACKGROUND

PIM is a manufacturer of popular snack foods. Defendant sells Beech-Nut branded foods to third parties. In late 2007, the parties began discussions about producing a toddlers' all natural gummy fruit snack called Fruit Nibbles for retail under the Beech-Nut brand.¹ Throughout the course of their dealings, the parties anticipated signing a two-year "Co-Pack" contract to govern their relationship. However, the parties were unable to agree to certain terms, and no long-term agreement was signed.

Despite having no long-term contract in place, PIM produced a sample batch of Fruit Nibbles which met Beech-Nut's color, texture and "bite" specifications. Based on approval of that sample, PIM began mass producing Fruit Nibbles in August 2008. PIM continued production until at least November 11, 2008. Through four signed Purchase Orders dated May 9, August 5, September 8, and October 13, 2008 (the "Purchase Orders"), Beech-Nut accepted and paid for approximately 230,000 cases of Fruit Nibbles.

Several provisions of those Purchase Orders bear on this matter:

1. Entire Agreement. The terms and conditions set forth in [these orders] constitute the entire agreement between the parties . . . and supersede . . . all previous verbal or written representations, agreements and conditions [unless modified in writing and signed by all parties].

4. Quality and Inspection. [PIM] warrants that the goods . . . furnished under the order will comply with the specifications, are fit for the purpose intended, merchantable and free from defects of material and workmanship and . . . [and upon] discovery of any defect, all rejections will be returned at [PIM's] risk and expense . . . [PIM] acknowledges and agrees that [Beech-Nut] shall be entitled to all warranties and remedies as provided by the Uniform Commercial Code ("U.C.C.").

17. This purchase order shall be construed in accordance with the laws of the State of New York as such laws are applied to contracts made to be fully performed in New York.

(Kowalski Declar., Ex. 13.)

In September 2008, Beech-Nut received its first delivery of Fruit Nibbles, which it sold to third parties. Shortly thereafter, Beech-Nut began receiving hundreds of complaints about Fruit Nibbles.² Although it is unclear exactly how widespread the problems with the shipped Fruit Nibbles were, on December 5, 2008, Beech-Nut instituted a national product withdrawal of all PIM-manufactured Fruit Nibbles.³

From mid-January through February 2009, the parties discussed issues related to the product recall. Beech-Nut maintained that these problems were PIM's responsibility; PIM, in turn, denied responsibility and declined to accept Fruit Nibbles returns from Beech-Nut.⁴ The parties also discussed relaunching Fruit Nibbles in Spring 2009, but understood that any future business relationship was predicated on resolving issues related to the recall. Ultimately, the parties did not resolve those issues and failed to "reach a co-packing or other contract relating to the prospective re-launch." (56.1 Statement ¶ 42.) On February 23, 2009, Beech-Nut advised PIM that it was going to use alternate suppliers for Fruit Nibbles.

On February 27, 2009, PIM sued Beech-Nut in Superior Court, asserting claims against Beech-Nut for breach of contract, breach of the implied covenant of good faith and fair dealing, and contract by estoppel.⁵ On March 21, 2011, Beech-Nut removed this action to District Court, where it asserted counterclaims against PIM for negligence and for breaches of express and implied warranties under the U.C.C. Presently, Beech-Nut moves for summary judgment dismissing all of PIM's claims and granting all of its counterclaims. Additionally, Beech-Nut now moves for an award of $3,454,140.45 for breach of warranty damages recoverable under the U.C.C., and for an award of $1,659,601.00 for lost profits on future sales caused by PIM's negligent manufacture of Fruit Nibbles.⁶

II. DISCUSSION

A. Summary Judgment Standard

Summary judgment is proper where the materials of record show "there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Beyer v. County of Nassau, 524 F.3d 160, 163 (2d Cir. 2008). In the present motion, the Court must consider all facts and their reasonable inferences in the light most favorable to PIM, the non-moving party. Summary judgment will be improper if "the evidence is such that a reasonable jury could return a verdict for [PIM]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

B. The Terms of the Purchase Orders Govern the Rights and Liabilities of the Parties for All Fruit Nibbles PIM Shipped to Beech-Nut

Beech-Nut purchased approximately 230,000 cases of Fruit Nibbles from PIM, as memorialized by the signed Purchase Orders. As a matter of law, the Court finds that the Purchase Orders are valid and enforceable contracts.⁷ U.C.C. § 2-201; Kay-Bee Toys Corp. v. Winston Sports Corp., 214 A.D. 2d 457, 458 (N.Y. App. Div. 1995) ("purchase orders may create a binding contract").

Pursuant to the Purchase Orders' express terms, they "constitute the entire agreement between the parties . . . and supersede . . . all previous verbal or written representations, agreements and conditions [unless modified in writing and signed by all parties]." (¶ 1.) See, e.g. Montefiore Medical Center v. Crest Plaza LLC, 2009 WL 1675994, at *12 (N.Y. Sup. Ct. 2009) (noting that New York courts strictly enforce merger clauses and denying admission of contradictory evidence where merger clause stated that lease alone fully expressed the parties' agreement, and could not be modified without a signed writing).

Pursuant to the Purchase Orders, PIM warranted that all shipped Fruit Nibbles would "comply with the specifications, [be] fit for the purpose intended, merchantable and free from defects of material and workmanship." (¶ 4.) Because the Purchase Orders were never modified by a subsequent signed writing, the terms therein govern the rights and obligations of PIM and Beech-Nut with respect to the 230,000 cases of Fruit Nibbles purchased by Beech-Nut.⁸ Accordingly, the Court finds that PIM bears the "risk and expense" for any defective Fruit Nibbles purchased by Beech-Nut. (¶ 4.)

C. Whether PIM's Breaches Constituted "Substantial Impairment" is a Disputed Factual Issue Which Precludes Awarding Beech-Nut Breach of Warranty Damages on Summary Judgment

It is undisputed that shortly after placing Fruit Nibbles on the market, Beech-Nut began receiving hundreds of complaints about the quality of the product. Thereafter, Beech-Nut determined that all shipped Fruit Nibbles were unsaleable and instituted a national recall of the product. After the recall, Beech-Nut attempted to revoke its acceptance of all Fruit Nibbles by returning them to PIM. However, PIM declined to accept their return.

Under the U.C.C., Beech-Nut may have been within its rights to revoke its acceptance of all shipped Fruit Nibbles. However, this right only arises when a products' non-conformity substantially impairs the value of the whole shipment. U.C.C. § 2-608(1). Substantial impairment is a factual issue. SCD RMA, LLC v. Farsighted Enterprises, Inc., 591 F. Supp. 2d 1131, 1138 (D. Hi. 2008) (citing 3 Williston on Sales § 25-15); Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444, 451-52 (W.D.N.Y. 1995) (noting that "whether goods conform to contract terms is a question of fact" and holding a trial to decide if potatoes failed to meet buyer's contracted-for color specifications and whether such failure constituted a substantial impairment of the installments); Glennville Elevators , Inc. v. Beard, 384 S.C. 335, 338 (S.C. Ct. App. 1985) (whether delivery ofunder-weight and under-moist corn bushels substantially impaired value of whole contract is a question of fact); RIJ Pharmaceuticals v. IVAX Pharmaceuticals, Inc., 322 F.Supp.2d. 406, 416 (S.D.N.Y. 2004) (declining to determine on summary judgment that shipments of medication were non-conforming as a question of fact).

Turning to the facts in this case, it is clear that at least some of the shipped Fruit Nibbles breached PIM's express warranties.⁹ However, there is also evidence suggesting that a sizeable portion of the Fruit Nibbles conformed with Beech-Nut's specifications. (Wallach Cert. Ex. J, (Nov. 21, 2008 e-mail from Shen-Young Chang stating that "products [shipped to Safeway] very good at this stage."); Wallach Cert., Ex. L. (Dep. of Frank McSorley at 56:4-7 stating that "there was many product even up until the last case that I produced for them that . . . was very good.").) Moreover, the record lacks evidence unequivocally quantifying the percentage of the product that was defective. Nor does it show just how substantial the variance was between the shipped Fruit Nibbles and the sample produced in August 2008.

On these facts, and affording all favorable inferences to PIM, the Court finds that a reasonable jury could conclude that hundreds of complaints about non-conforming Fruit Nibbles in 230,000 cases did not substantially impair the value of the entire shipment to Beech-Nut such that it was entitled to revoke acceptance of all...