Judge: Daniel S. Murphy, Case: 19STCV37687, Date: 2022-12-09 Tentative Ruling

Case Number: 19STCV37687    Hearing Date: December 9, 2022    Dept: 32

BACKGROUND

            On October 21, 2019, Lenny & Larry’s, LLC (“Plaintiff”) filed this action against A&B Ingredients, Inc. (“Defendant”), alleging (1) breach of the implied warranty of merchantability, (2) breach of the implied warranty of fitness, (3) negligence, and (4) unfair competition. The lawsuit arises from the following pertinent facts.

            Plaintiff is a manufacturer of health and fitness oriented food products, such as cookies. Defendant sells a variety of ingredients to food manufacturers, including Plaintiff. The particular ingredient at issue in this case is the antioxidant CytoGuard. CytoGuard is a cultured dextrose powder (“CDP”). Plaintiff alleges that the inclusion of CDP in its cookies caused the products to have an “off flavor” and “soapy” taste, leading to customer complaints and forcing Plaintiff to discontinue sales. Plaintiff contends that the cause of the flavor issue was the presence of lipase in the CDP.  

            On February 2, 2022, the Court granted Defendant’s motion for summary adjudication as to the negligence claim pursuant to the economic loss rule. On May 23, 2022, the Court granted Plaintiff leave to amend the complaint to add a cause of action based on fraud. The operative Second Amended Complaint alleges (1) breach of the implied warranty of merchantability, (2) breach of the implied warranty of fitness, (3) negligent misrepresentation, (4) fraudulent misrepresentation, and (5) unfair competition.

            On September 21, 2022, Defendant A&B Ingredients filed the instant motion for summary judgment or adjudication in the alternative.  

LEGAL STANDARD

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party cannot show evidentiary support for a pleading or claim and to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) Code of Civil Procedure section 437c, subdivision (c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.) “The function of the pleadings in a motion for summary judgment is to delimit the scope of the issues; the function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67, citing FPI Development, Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-382.)

As to each claim as framed by the complaint, the defendant moving for summary judgment must satisfy the initial burden of proof by presenting facts to negate an essential element, or to establish a defense. (Code Civ. Proc., § 437c, subd. (p)(2); Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1520.) Once the defendant has met that burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)

EVIDENTIARY OBJECTIONS

            Both parties’ objections are overruled.

DISCUSSION

I. Breach of Warranty

            “Vertical privity is a prerequisite in California for recovery on a theory of breach of the implied warranties of fitness and merchantability.” (Fieldstone Co. v. Briggs Plumbing Products, Inc. (1997) 54 Cal.App.4th 357, 371.) “There is no privity between the original seller and a subsequent purchaser who is in no way a party to the original sale.” (Ibid.) However, “where . . . the manufacturer or supplier affirmatively engages in conduct directly with the purchaser that functionally places the party in the position of the direct seller, it is fair and appropriate to imply a warranty that the goods will be fit for the buyer's purposes, if all other elements of the claim have been established.” (Cardinal Health 301, Inc. v. Tyco Electronics Corp. (2008) 169 Cal.App.4th 116, 144.)

            It is undisputed that Plaintiff purchased the problematic cookies from three bakeries that purchased CDP from Defendant. (UF 4-6.) Plaintiff did not purchase CDP directly from Defendant. (Ibid.) However, the “direct dealings” exception may apply. Defendant introduced Plaintiff to CDP as a replacement for the prior YM product that Plaintiff was using. (Plntf.’s Ex. 16 (Bakal Depo.) 248:1-4.) Defendant worked with Plaintiff to ensure that CDP would be an adequate replacement for Plaintiff’s cookies, such as making representations that CDP would be similar in performance to YM, sending samples of CDP for testing in Plaintiff’s cookies, and providing nutritional information. (AF 13, 16, 17.) Defendant understood that Plaintiff had bakeries, or co-manufacturers, who did the actual baking of the cookies. (Bakal Depo. at 221:6-11.) But it was Plaintiff and Defendant who agreed on the pricing for CDP that the bakeries would use. (AF 19.) Defendant understood that the cookies were being made to sell under Plaintiff’s name, Lenny & Larry’s. (Bakal Depo. at 225:19-23.)

            In sum, Defendant presented CDP to Plaintiff as a replacement to YM, assisted Plaintiff in the implementation of CDP into Plaintiff’s cookies, negotiated pricing with Plaintiff, and sold CDP to the bakeries with the understanding that the bakeries would use CDP to make cookies for Plaintiff. The court in Cardinal Health held that a similar fact pattern justifies application of the direct dealings exception. (Cardinal Health, supra, 169 Cal.App.4th at p. 142.) In that case, “T&B was aware that Cardinal would select a third party to serve as the middleman to purchase the spring probe connectors from T&B and then assemble these connectors on the manufactured MOAB's, and sell the finished MOAB product to Cardinal. T&B accepted this arrangement, by specifically agreeing to sell the spring probe connectors to the middleman (to be named) at the same price, and essentially agreed that it would sell the spring probe connectors to the third party in the exact same design, materials, and size as the Cardinal/T&B agreement.” (Ibid.) The court had “no problem finding that T&B had sufficient vertical privity with Cardinal to support an implied warranty cause of action . . . .” (Ibid.) The bakeries here similarly served as the middlemen that implemented CDP into the cookies in accordance with the arrangement between Plaintiff and Defendant.

            Defendant points to two distinguishable cases that declined to apply the direct dealings exception. In Fieldstone Co. v. Briggs Plumbing Products, Inc. (1997) 54 Cal.App.4th 357, 371, fn. 12, the court found insufficient evidence that the parties “dealt directly with each other vis-à-vis the purchase.” In All West Electronics, Inc. v. M-B-W, Inc. (1998) 64 Cal.App.4th 717, 726-27, “there was no evidence MBW or its agent negotiated the sale of its paver to All West . . . [and] MBW did not deal directly with All West regarding the ‘purchase’ of the paver.” This case is different because Defendant communicated directly with Plaintiff to introduce and help implement CDP and negotiated the sale of CDP with Plaintiff. The evidence, when interpreted in Plaintiff’s favor (Dore, supra, 39 Cal.4th at p. 389), supports a reasonable inference that privity is satisfied through the direct dealings exception. Therefore, there is a triable issue as to the breach of warranty claims.

II. Fraud

            a. Statute of Limitations

Fraud claims are subject to a three-year statute of limitations. (Code Civ. Proc., § 338(d).) “The cause of action in that case is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Ibid.) “The statute of limitations begins to run when the plaintiff has information which would put a reasonable person on inquiry.” (Kline v. Turner (2001) 87 Cal.App.4th 1369, 1374.) “Generally, statute of limitations issues raise questions of fact that must be tried; however, when the uncontradicted facts are susceptible of only one legitimate inference, summary judgment is proper.” (Ibid.)

            1. Delayed Discovery

            Defendant argues that Plaintiff should have discovered Defendant’s purported misrepresentations by September 2018, when Plaintiff’s expert, Richard Rothamel, reported to Plaintiff that the CDP contained lipase. (UF 10.) The fraud claims were not asserted until May 2022 in an amended complaint. However, when the flavor issue arose, Defendant maintained that CDP did not contain lipase. (Plntf.’s Ex. 28.) Defendant did not disclose that another customer, Gertrude Hawk, suffered a similar flavor issue and had also suspected lipase in CDP. (AF 28-30, 34.) Defendant internally acknowledged the possibility that “there is some residual enzymatic activity in the product.” (AF 35.) Defendant also acknowledged a “Lipase contamination issue . . . .” (AF 47.) These facts were not disclosed to Plaintiff despite Plaintiff’s inquiries regarding lipase activity. (AF 33.)

“[T]he culpable defendant should be estopped from profiting by his own wrong to the extent that it hindered an otherwise diligent plaintiff in discovering his cause of action.” (Bernson v. Browning-Ferris Industries (1994) 7 Cal.4th 926, 931.) A reasonable jury may find that Defendant’s omissions and affirmative representations hindered Plaintiff from suspecting fraud until discovery in this case revealed internal communications showing that Defendant was aware of a lipase issue. It cannot be determined as a matter of law at this stage that “the plaintiff suspected or should have suspected that an injury was caused by wrongdoing.” (See Kline, supra, 87 Cal.App.4th at p. 1374.)

            2. Relation Back

Additionally, the fraud allegations in the SAC may relate back to the original, timely complaint, if they “(1) rest on the same general set of facts, (2) involve the same injury, and (3) refer to the same instrumentality, as the original one.” (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 409.) “An amended complaint relates back to an earlier complaint if it is based on the same general set of facts, even if the plaintiff alleges a different legal theory or new cause of action.” (Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 277.) “[T]he critical inquiry is whether the defendant had adequate notice of the claim based on the original pleading.” (Ibid.) “Additionally, in applying the relation-back analysis, courts should consider the strong policy in this state that cases should be decided on their merits.” (Ibid.)

Here, the original complaint and SAC revolve around the same set of facts—i.e., Plaintiff utilized Defendant’s CDP in its cookies, which caused a flavor issue leading to lost sales and other damages. Defendant argues that “[t]he Complaint contained no fraud cause of action, no allegations that Defendant made fraudulent misrepresentations to Plaintiff, and no allegations of detrimental reliance on such misrepresentations.” (Mtn. 14:23-15:3.) However, the relation back doctrine applies “even if the plaintiff alleges a different legal theory or new cause of action.” (Pointe San Diego, supra, 195 Cal.App.4th at p. 277.) If Plaintiff had alleged a fraud claim in the original complaint, then the statute of limitations would not be at issue, and the relation back doctrine would have no use.  

Defendant also relies on Davaloo v. State Farm Ins. Co. (2005) 135 Cal.App.4th 409, 417, where “the original complaints [were] so devoid of factual allegations they fail[ed] to meet section 425.10, subdivision (a)'s minimal fact-pleading requirement and [were] the functional equivalent of no complaint at all.” Therefore, the court held that it was “impossible to conclude the first amended complaints are based on the same general set of facts as the original complaints.” (Ibid.) This is not the case here, where Plaintiff’s original complaint was not factually deficient and in fact alleged that “Defendant has deceived Plaintiff” and referred to “Defendant’s acts, omissions, misrepresentations, practices, and non-disclosures” as “fraudulent business practices.” (Compl. ¶¶ 25-27.) This was sufficient to place Defendant on notice of the possibility of a fraud claim, and Defendant would have known to conduct investigations into and preserve evidence relating to their provision of CDP for Plaintiff’s cookies. (See Pointe San Diego, supra, 195 Cal.App.4th at p. 278.)   

For these reasons, the statute of limitations does not bar Plaintiff’s fraud claims.

b. Detrimental Reliance

“Actual reliance occurs when a misrepresentation is an immediate cause of a plaintiff's conduct, which alters his legal relations, and when, absent such representation, he would not, in all reasonable probability, have entered into the contract or other transaction.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 976, internal citations omitted.) “It is not necessary that a plaintiff's reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct. It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.” (Id. at pp. 976-77.)  

Defendant argues that Plaintiff could not have detrimentally relied on Defendant’s representations regarding CDP because Plaintiff actually relied on testing which established that CDP could be used in the cookies without issue. Defendant further argues that Plaintiff could not have relied on representations made between December 2017 and March 2018 because the flavor issue was already occurring by August to November 2017. However, Plaintiff relied on representations made before December 2017, including at the outset, when Defendant represented that CDP would be an adequate replacement for YM. (AF 13, 16, 17.) Furthermore, the samples Defendant provided for Plaintiff to test were themselves representations on which Plaintiff could have relied. The fact that CDP did not present flavor issues during testing but had issues when actually distributed raises a reasonable inference of fraud—i.e., Defendant shipped a different quality product than what it represented through the samples. Additionally, Plaintiff’s reliance is not limited to purchasing CDP and selling defective cookies. Plaintiff also incurred additional investigation costs to discover the true cause of the flavor issue since Defendant denied that their CDP was to blame. (AF 52.) The evidence sufficiently raises a triable issue over whether Plaintiff detrimentally relied on Defendant’s representations.

In conclusion, the evidence sufficiently raises an inference of fraud, and there are triable issues regarding the statute of limitations. Therefore, the fraud claims cannot be summarily adjudicated.

III. UCL

            “The scope of the remedies available under the UCL . . . is limited. A UCL action is equitable in nature; damages cannot be recovered. We have stated under the UCL, [p]revailing plaintiffs are generally limited to injunctive relief and restitution.” (Tucker v. Pacific Bell Mobile Services (2012) 208 Cal.App.4th 201, 226.) For restitution, “[t]he defendant is asked to return something he wrongfully received; he is not asked to compensate the plaintiff for injury suffered as a result of his conduct.” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1268.) Restitution is limited “to situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired.” (Ibid.)

            Defendant argues that Plaintiff is not entitled to restitution because Plaintiff did not purchase CDP directly from Defendant. However, Defendant cites no authority limiting restitution under the UCL to instances where the defendant literally takes something directly from the plaintiff. In this case, the evidence raises a reasonable inference that Defendant made misrepresentations to Plaintiff, inducing Plaintiff to agree to use CDP in its cookies. As discussed above, Defendant negotiated the price of CDP with Plaintiff and knew that Plaintiff would purchase the CDP-infused cookies from the bakeries. If Defendant accomplished this transaction by fraud and profited from it, then Defendant may justifiably be “required to restore to the plaintiff that which was wrongfully acquired.” (See Bank of the West, supra, 2 Cal.4th at p. 1268.) The remedies available under the UCL are “cumulative to each other and to the remedies or penalties available under all other laws of this state.” (Bus. & Prof. Code, § 17205.)

            Lastly, Defendant argues that the UCL claim fails because there are no predicate “unlawful” acts given Plaintiff’s other causes of action fail. However, as discussed above, those causes of action do not fail and may serve as the basis for a UCL claim.

            In sum, there are triable issues as to the UCL claim, precluding summary adjudication.

CONCLUSION

            Defendant’s motion for summary judgment or adjudication is DENIED.