Simplot v. Nestle USA, Inc

Filing 69

MEMORANDUM ORDER granting 42 Motion for Summary Judgment; finding as moot 54 Motion to Strike. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by jlg)

I N THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF IDAHO J . R . SIMPLOT COMPANY, a Nevada corporation, Plaintiff, vs. N E S T L É USA, INC., a Delaware corporation, Defendant. ) ) ) ) ) ) ) ) ) ) ) C a s e No. CV 06-141-S-EJL M E M O R A N D U M ORDER

P e n d i n g before the Court in the above-entitled matter is Defendants motion for s u m m a r y judgment and related motion to strike. The parties have filed their responsive b r i e f i n g and the matter is now ripe for the Court's review. Having fully reviewed the r e c o r d herein, the Court finds that the facts and legal arguments are adequately p r e s e n t e d in the briefs and record. Accordingly, in the interest of avoiding further

d e l a y , and because the Court conclusively finds that the decisional process would not be s i g n i f i c a n t l y aided by oral argument, this motion shall be decided on the record before t h i s Court without oral argument. F a c t u a l and Procedural Background P l a i n t i f f , J.R. Simplot Company, Inc. ("Simplot"), initiated this lawsuit against t h e Defendant, Nestle USA, Inc. ("Nestle"), in the Fourth Judicial District for the state o f Idaho. The action was then removed to this Court. (Dkt. No. 1). Thereafter, Simplot f i l e d a second amended complaint (Dkt. No. 39) raising claims for breach of contract as t o the Distribution Agreement and the Asset Purchase Agreement, breach of the implied MEMORANDUM ORDER - 1

c o v e n a n t of good faith and fair dealing, fraud, breach of fiduciary duty, negligent breach o f fiduciary duty, and fraudulent concealment. 1 Nestle filed the instant motion for

s u m m a r y judgment and answer to the second amended complaint (Dkt. Nos. 42, 68). At i s s u e in this case is the parties' dispute over the nature of their relationship involving t h e distribution and sale of dehydrated potato products as reflected by the written c o n t r a c t s executed by the parties entitled: the Amended and Restated Purchase

A g r e e m e n t ("Purchase Agreement"), the Distribution Agreement, and the Asset P u r c h a s e Agreement. P r i o r to 2000, Nestle was engaged in the business of manufacturing, distributing, a n d selling both frozen and dehydrated potato products. The frozen products were

p r o d u c e d at three separate processing plants, including a facility Nestle owned in Moses L a k e , Washington. Nestle manufactured a dehydrated potato product labeled "Trio" at o n l y the Moses Lake plant. Nestle also purchased a dehydrated potato product labeled " I d a h o a n " from a company called Idaho FreshPak, Inc. ("IFP"). IFP manufactured the I d a h o a n Products and sold them to Nestle for it to market and sell in the United States. I n 2000, Nestle put its frozen and dehydrated potato business up for sale. O n July 28, 2000, Nestle and Simplot entered into the Purchase Agreement ( " P u r c h a s e Agreement) whereby Simplot purchased the Moses Lake plant from Nestle. O n October 2, 2000, the parties entered into the Distribution Agreement which e s t a b l i s h e d the parties relationship regarding the distribution of dehydrated potato p r o d u c t s processed at the Moses Lake plant. The Distribution Agreement provided for S i m p l o t to produce and sell such products to Nestle sufficient to satisfy Nestle's

Simplot has dismissed counts four and six of the second amended complaint. (Dkt. No. 52, p. 2).

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r e q u i r e m e n t s ; Nestle would then distribute the products and the parties would divide the n e t profits. On December 4, 2003, the parties executed the Asset Purchase Agreement w h e r e b y Simplot would purchase from Nestle all existing inventory and take over the o p e r a t i o n of the dehydrated potato products venture. The closing date on this agreement w a s initially December 31, 2003 but later extended by the parties to June 30, 2004. F o l l o w i n g the closing, profits failed to meet the levels previously enjoyed. Simplot a r g u e s the diminished profits were due to Nestle's trade loading and sales of excessive i n v e n t o r y to large customers thereby limiting Simplot's ability to sell inventory to those c u s t o m e r s for a significant period of time following the closing. (Dkt. No. 39, ¶ 16). T h i s conduct by Nestle, Simplot alleges, was in violation of the parties' agreements and c o n s t i t u t e s breach. Nestle counters that it acted in accordance with its legal rights and p e r f o r m e d in accordance with the terms of the contracts. (Dkt. No. 68, p. 7-10). S t a n d a r d of Law M o t i o n s for summary judgment are governed by Rule 56 of the Federal Rules of C i v i l Procedure. Rule 56 provides, in pertinent part, that judgment "shall be rendered f o r t h w i t h if the pleadings, depositions, answers to interrogatories, and admissions on f i l e , together with the affidavits, if any, show that there is no genuine issue as to any m a t e r i a l fact and that the moving party is entitled to a judgment as a matter of law." F e d . R. Civ. P. 56(c). T h e Supreme Court has made it clear that under Rule 56 summary judgment is m a n d a t e d if the non-moving party fails to make a showing sufficient to establish the e x i s t e n c e of an element which is essential to the non-moving party's case and upon w h i c h the non-moving party will bear the burden of proof at trial. See Celotex Corp v. MEMORANDUM ORDER - 3

C a t r e t t , 477 U.S. 317, 322 (1986). If the non-moving party fails to make such a showing o n any essential element, "there can be no `genuine issue of material fact,' since a c o m p l e t e failure of proof concerning an essential element of the nonmoving party's case n e c e s s a r i l y renders all other facts immaterial." Id. at 323. 2 M o r e o v e r , under Rule 56, it is clear that an issue, in order to preclude entry of s u m m a r y judgment, must be both "material" and "genuine." An issue is "material" if it a f f e c t s the outcome of the litigation. An issue, before it may be considered "genuine," m u s t be established by "sufficient evidence supporting the claimed factual dispute . . . t o require a jury or judge to resolve the parties' differing versions of the truth at trial." H a h n v. Sargent, 523 F.2d 461, 464 (1st Cir. 1975) (quoting First Nat'l Bank v. Cities S e r v . Co. Inc., 391 U.S. 253, 289 (1968)). The Ninth Circuit cases are in accord. See, e . g . , British Motor Car Distrib. v. San Francisco Automotive Indus. Welfare Fund, 882 F . 2 d 371 (9th Cir. 1989). A c c o r d i n g to the Ninth Circuit, in order to withstand a motion for summary j u d g m e n t , a party ( 1 ) must make a showing sufficient to establish a genuine issue of fact w i t h respect to any element for which it bears the burden of proof; (2) m u s t show that there is an issue that may reasonably be resolved in favor o f either party; and (3) must come forward with more persuasive evidence t h a n would otherwise be necessary when the factual context makes the n o n - m o v i n g party's claim implausible.

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See also, Rule 56(e) which provides, in part: W h e n a motion for summary judgment is made and supported as provided in this r u l e , an adverse party may not rest upon the mere allegations or denials of the a d v e r s e party's pleadings, but the adverse party's response, by affidavits or as o t h e r w i s e provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary j u d g m e n t , if appropriate, shall be entered against the adverse party.

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I d . at 374 (citation omitted). O f course, when applying the above standard, the court must view all of the e v i d e n c e in a light most favorable to the non-moving party. Anderson v. Liberty Lobby, I n c . , 477 U.S. 242, 255 (1986); Hughes v. United States, 953 F.2d 531, 541 (9th Cir. 1992). Discussion I. C o u n t s One and Two: Breach of Contract - Distribution Agreement/Purchase Agreement N e s t l e claims summary judgment is proper here because it has not breached any t e r m s of any of the contracts between the parties. In response, Simplot argues that N e s t l e has "missed the point" of its breach of contract claims and that it is "not alleging t h a t conduct of Nestle violated express contract provisions. Rather...that Nestle

b r e a c h e d the parties' joint venture agreements by breaching the covenant of good faith a n d fair dealing and fiduciary duties owed to Simplot by robbing the business of its p r o f i t a b i l i t y and cash flow, thereby depriving Simplot of the benefits of its bargains, and b y failing to timely disclose to Simplot major business decisions which negatively i m p a c t e d the profitability of the business." (Dkt. No. 52, p. 27). Simplot's response c o n c e d e s that it is not claiming Nestle breached an express term of the contracts but, i n s t e a d that Nestle breached the implied covenant of good faith and fair dealing. (Dkt. N o . 52, p. 27). The covenant, however, can not be the basis for a breach of contract claim. "Under Delaware law, the elements of a breach of contract claim are: 1) a

c o n t r a c t u a l obligation; 2) a breach of that obligation by the defendant; and 3) a resulting d a m a g e to the plaintiff." H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140

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( D e l . C h . 2003) (citation omitted). Similarly in California, the "elements of a claim for b r e a c h of contract are: "(1) the contract, (2) plaintiff's performance or excuse for n o n p e r f o r m a n c e , (3) defendant's breach, and (4) damage to plaintiff therefrom." Wall

S t r e e t Network, Ltd. v. New York Times Co., 80 Cal.rptr.3d 6, 13 (Cal. App. 2008) ( c i t a t i o n omitted). I t is true that a breach of the implied covenant of good faith and fair dealing, by i t s e l f , "will support a contract action" without any breach of a specific term of the c o n t r a c t . Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 122 Cal.Rptr.2d 267, 2828 3 (Cal.App. 2002); see also Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 4414 2 (Del. 2005) (describing the implied covenant as "a `judicial convention designed to p r o t e c t the spirit of the agreement when, without violating an express term of the a g r e e m e n t , one side uses oppressive or underhanded tactics to deny the other side the f r u i t s of the parties' bargain.'"). However, Simplot has failed to provide any authority t h a t a breach of the implied covenant of good faith and fair dealing can also be the basis f o r a separate breach of contract claim. Because Simplot is not alleging any breach of a n y express contract term of either the Distribution Agreement or the Purchase A g r e e m e n t , the motion for summary judgment is granted as to Counts One and Two. II. R e m a i n i n g Claims S i m p l o t ' s theory of the case is that the parties were engaged in a joint venture b e g i n n i n g in July of 2000, when the parties negotiated the Purchase Agreement. At that t i m e , Simplot made its initial purchase offer to Nestle based upon the value of the ong o i n g potato business and the assumption that Simplot would continue to sell dehydrated

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p o t a t o products under both the Idahoan and Trio labels. 3 (Dkt. No. 52, p. 4). Simplot v i e w e d the two products, Idahoan and Trio, as making up a complete dehydrated potato p r o d u c t line. (Dkt. No. 52, pp. 4-5). During the negotiations of the Purchase

A g r e e m e n t , Simplot's position was that "it could not preserve the profitability of a d e h y d r a t e d potato product business without having control over both the essential I d a h o a n and Trio Product lines" and, therefore, it could not justify its initial purchase p r i c e "if it could not retain the profitability of the dehydrated potato business." (Dkt. N o . 52, p. 5) ("preserving the profit stream from the dehydrated potato business was v i t a l to Simplot's willingness to buy the potato business" from Nestle for the initial p u r c h a s e price and "without the Trio label and the Idahoan business, it could not r e p l i c a t e the profit stream...."). Because Nestle was "adamant" about retaining the

i n i t i a l purchase price, Simplot argues, "the parties agreed to enter into a joint venture w h e r e Simplot would take responsibility for manufacturing granule products with the T r i o label and Nestle would take responsibility for marketing, selling and distributing b o t h the Trio Products and the Idahoan Products, with the profits from the sales of both t o be split between Nestle and Simplot." (Dkt. No. 52, p. 5). This understanding,

S i m p l o t argues, was formalized in Paragraph 6.9 of the Purchase Agreement and t h e r e a f t e r incorporated into the Distribution Agreement. T h e Distribution Agreement, Simplot contends, was where "the parties formed t h e i r joint enterprise" with Simplot being required to produce for purchase and resale by N e s t l e the Trio Products and Nestle being given the exclusive right to distribute the Trio

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Trio Products are a dehydrated granule commodity product marketed under the registered trademark " T r i o " which were manufactured by Simplot at the Moses Lake processing plant. The Idahoan Products w e r e value-added dehydrated potato products produced by Idaho FreshPak, Inc. ("IFP") under the " I d a h o a n " label which is owned by IFP. (Dkt. No. 52, p. 3).

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P r o d u c t s and the parties sharing in the profits from Nestle's sales of the Idahoan P r o d u c t s . (Dkt. No. 52, p. 6). Simplot maintains that "[t]here is no dispute that the p r i m a r y purpose of the Distribution Agreement was to preserve and maximize the p r o f i t a b i l i t y of the dehydrated potato business" by giving both parties "some measure of o w n e r s h i p and control over the dehydrated potato business" in the form of "checks and b a l a n c e s . " (Dkt. No. 52, pp. 7-8). Simplot further alleges that both parties viewed the r e l a t i o n s h i p as a joint venture, pointing to writings and correspondence outside of the c o n t r a c t s . In order for Simplot's claims to survive, there must be a joint venture that existed.4 A. C o n t r a c t Interpretation

T o support its interpretation of the contracts, Simplot points to the written c o n t r a c t s themselves as well as other correspondence by the parties. In particular,

S i m p l o t has offered the affidavit of James Munyon, Simplot's Food Group president, w h o negotiated the Distribution Agreement on Simplot's behalf. (Dkt. No. 52, Aff. Munyon). Mr. Munyon provides his understanding of the terms of the Distribution Simplot further asserts that "Nestle

A g r e e m e n t as creating a joint venture.

r e p r e s e n t a t i v e s also viewed the parties' relationship as a joint venture" pointing to c e r t a i n written documents prepared by Nestle which, Simplot contends, referred to the b u s i n e s s as the "potato joint venture." (Dkt. No. 52, p. 5-7 and Dkt. No. 52-3, Statement o f Disputed Facts, ¶ 33). Nestle counters that Simplot cannot rely upon parol evidence

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Count Five alleges breach of fiduciary duty by Nestle. The source of these fiduciary duties is derived f r o m the joint venture alleged by Simplot, not any expressed term of any of the contract provisions. Count S e v e n alleges fraudulent concealment against Nestle in regards to its sale of product to a third-party, S Y S C O , which Simplot argues was done in violation of a fiduciary duty owed to Simplot from Nestle. As s u c h , the question as to whether a joint venture exists is similarly dispositive of Counts Five and Seven.

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t o change the plain and unambiguous meaning of the contracts which, Nestle argues, do n o t support the finding of a joint venture. (Dkt. No. 58, p. 26). T h e Distribution Agreement is governed by Delaware law which directs that c o u r t s begin their construction of the contract by determining whether the contract c l e a r l y and accurately reflects the agreement of the parties. Interim Healthcare, Inc. v.

S p h e r i o n Corporation, 884 A.2d 513, 546 (Del.Super. Ct. 2005). Ambiguity exists when t h e contract provisions in controversy "are reasonably or fairly susceptible of different i n t e r p r e t a t i o n s or may have two or more different meanings ." Id. (citation omitted). If, a f t e r careful consideration, the court determines that the contract is a clear and accurate r e f l e c t i o n of the parties' intended agreement, extrinsic evidence will not be considered a n d the interpretation is limited to the four corners of the contract. 5 Id. However, a c o n t r a c t is not rendered ambiguous simply because the parties disagree as to the m e a n i n g of its terms. Id. at 547. "The true test is not what the parties to the contract i n t e n d e d it to mean, but what a reasonable person in the position of the parties would h a v e thought it meant." Lorillard Tobacco Co. v. American Legacy Found., 903 A.2d 7 2 8 , 740 (Del. 2006) (citations omitted). Ambiguity does arise, however, when the

c o n t r a c t provisions in controversy "are reasonably or fairly susceptible of different i n t e r p r e t a t i o n s or may have two or more different meanings ." Id. (citation omitted). "If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of t h e parties, to vary the terms of the contract or to create an ambiguity." Eagle Indus.,

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The parol evidence rule requires that "[w]hen two parties have made a contract and have expressed it in a w r i t i n g to which they have both assented as the complete and accurate integration of that contract, e v i d e n c e , whether parol or otherwise, of antecedent understandings and negotiations will not be admitted f o r the purpose of varying or contradicting the writing." 26 Corbin on Contracts § 573 (1960).

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I n c . v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. Supr. 1997) (citations omitted). T h e Purchase Agreement is governed by California law which applies essentially t h e same rules for contract interpretation. See Wolf v. Walt Disney Pictures and

T e l e v i s i o n , 76 Cal. Rptr.3d 585, 601-602 (Cal. App. 2008) (the "rules governing the role o f the court in interpreting a written instrument are well established."). The interpretation of a contract is a judicial function. In engaging in this f u n c t i o n , the trial court "give[s] effect to the mutual intention of the p a r t i e s as it existed" at the time the contract was executed. Ordinarily, the o b j e c t i v e intent of the contracting parties is a legal question determined s o l e l y by reference to the contract's terms. The court generally may not consider extrinsic evidence of any prior a g r e e m e n t or contemporaneous oral agreement to vary or contradict the c l e a r and unambiguous terms of a written, integrated contract. Extrinsic e v i d e n c e is admissible, however, to interpret an agreement when a material t e r m is ambiguous. I d . (citations omitted). The interpretation of a contract is a mixed question of law and fact. See O'Niell v . United States, 50 F.3d 677, 682 (9th Cir. 1995). Whether contract language is

a m b i g u o u s is a question of law. See id. In examining the contracts at issue in this case, t h e Purchase Agreement, Distribution Agreement, and Asset Purchase Agreement, the C o u r t finds the contracts each to be unambiguous. businesses. The parties are sophisticated

The contracts themselves evidence that the parties undertook extensive

n e g o t i a t i o n s in crafting the contracts. The terms expressed by the contracts are clear a n d are not subject to different interpretations by a reasonable person. Therefore,

e x t r i n s i c evidence will not be considered to modify the terms of the contracts. The q u e s t i o n then is whether the contracts created a joint venture.

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B.

Joint Venture

T h e Distribution Agreement is governed by Delaware law. Both parties have c i t e d to Warren v. Goldfinger Bros., 414 A.2d 507, 508 (Del. 1980) where the Delaware S u p r e m e Court recognized that the existence of a joint venture "may be implied or p r o v e n by facts and circumstances showing that (a relationship of joint venture) was in f a c t entered into (citation omitted). A joint adventure has been broadly defined as an e n t e r p r i s e undertaken by several persons jointly to carry out a single business enterprise, n o t amounting to a partnership, for their mutual benefit, in which they combine their p r o p e r t y , money, effects, skill and knowledge. The contribution of the parties need not n e c e s s a r i l y be the same; one party may contribute land, another skill and experience, the t h i r d cash (citations omitted)." Id. at 508-09 (quoting J. Leo Johnson, Inc. v. Carmer, 1 5 6 A.2d 499, 502 (Del. Supr. 1959)). The Delaware court went on to identify the e l e m e n t s of a joint venture as: "(1) a community of interest in the performance of a c o m m o n purpose, (2) joint control or right of control, (3) a joint proprietary interest in t h e subject matter, (4) a right to share in the profits, (5) a duty to share in the losses w h i c h may be sustained." Id. (citing Kilgore Seed Co. v. Lewin, 141 So.2d 809, 810-11 ( F l a . App. 1962)). The Court's determination as to the parties' relationship is

" p r e d o m i n a n t l y a factual one of applying the facts as found to criteria defining the d i f f e r i n g legal relationships...." Warren, 414 A.2d at 508; see also J. Leo Johnson, 156 A . 2 d at 502; Quill v. Malizia, No. 2239-S, 2005 WL 5755354, *12 n. 34 (Del.Ch. 2005) ( " A joint venture may be established based on the facts and circumstances surrounding t h e parties' interactions...."). Nestle disagrees that the Distribution Agreement created a joint venture and a r g u e s , instead, that the parties' agreements evidence the fact that they are separate MEMORANDUM ORDER - 11

e n t i t i e s engaged only in a business relationship. Nestle contends the parties do not (1) o w n assets together, (2) have legal right to control the operations of the other, and/or (3) s h a r e losses. 1. J o i n t l y owned assets

N e s t l e argues that the contracts did not provide for any jointly owned assets b e t w e e n the parties. Simplot counters that its purchase of the dehydrated foods business a n d the interrelation of the Trio trademarks and Idahoan products/label evidences that t h e parties had jointly owned assets. Simplot argues the parties share a proprietary i n t e r e s t due to the interrelationship between Simplot's ownership of the granule d e h y d r a t e d potato business, the licensing of the Trio label, the rights to sell and d i s t r i b u t e the Idahoan Products, and the parties "ownership interest in the profits from t h e sale of the Trio and Idahoan Products." (Dkt. No. 52, p. 19). Simplot's argument that the parties jointly owned the profits from the sale of the T r i o and Idahoan products is contrary to the language of the contracts. However, the p l a i n language of the contracts do not evidence any joint ownership of assets. Though t h e contracts contained provisions regarding the Trio label and Idahoan products, there i s nothing in the contracts evidencing a joint ownership by the two parties of any p r o p e r t y or rights as to the Trio of Idahoan products. Simplot purchased the dehydrated p o t a t o business in the Purchase Agreement. Thereafter, the parties entered into

c o n t r a c t s for the manufacturing and resale of those products subject to certain terms and c o n d i t i o n s . The two businesses remained separate entities having no joint assets, bank a c c o u n t s , tax returns, employees, or facilities. The contracts spelled out how the profits w o u l d be divided between the two businesses with each having certain rights to a s p e c i f i e d percentage of the profits, not joint ownership. MEMORANDUM ORDER - 12

2.

A b i l i t y to Control of Operations of the Other

N e s t l e points to ¶ 7 of the Distribution Agreement arguing "Nestle had no legal r i g h t to control Simplot in its manufacturing operations, and Simplot had no legal right t o control Nestle in its marketing, sales, and distribution of dehydrated potato products." ( D k t . No. 58, p. 19). In response, Simplot argues the Distribution Agreement provides f o r "checks and balances" between the parties which amounts to control. Simplot

c o n t e n d s the parties were "partners in Nestle's food service business...[and] [j]ust b e c a u s e Simplot delegated primary responsibility for managing marketing, sales and d i s t r i b u t i o n to Nestle...does not mean that Simplot relinquished all control to Nestle o v e r those aspects of the business. The expectation of the parties was clearly to

c o o p e r a t e in good faith to maximize profits of the business, and to consult with one a n o t h e r on all major issues and decisions affecting the business's profitability, r e g a r d l e s s [of] whether such decision involved sales, distribution or manufacturing i s s u e s . " (Dkt. No. 52, p. 22). Further, Simplot argues the parties conduct under the c o n t r a c t s evidences that they exercised some measure of oversight and control over the o p e r a t i o n s of one another. (Dkt. No. 52, p. 23). Pointing to the fact that the parties met r e g u l a r l y to discuss and share information, prepare and analyze the six-month profit and l o s s statements, and making joint business calls. Simplot alternatively argues disputed m a t e r i a l facts preclude a determination of whether the parties had a mutual right of c o n t r o l sufficient to create a joint venture. (Dkt. No. 52, p. 21). Simplot contends that t h e "concept of control ... is very flexible and does not have a fixed or certain boundary, d e p e n d i n g instead on the facts of a particular case." (Dkt. No. 52, p. 21) (citing Simplot's interpretation,

S h e p p a r d v. Carey, 254 A.2d 260, 262-63 (Del.Ch. 1969)).

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h o w e v e r , does not square with the plain and express language of the contract. Paragraph 7 of the Distribution Agreement states: N e s t l e ' s relationship with Simplot is that of an independent contractor. N o t h i n g in this Agreement shall be deemed to create an agency or e m p l o y e e relationship between the parties, and no such relationship p r e s e n t l y exists between them. Each party shall take such steps, do such t h i n g s , hire and direct such personnel, as may be necessary to enable it to p e r f o r m its obligations hereunder. Neither party shall have any control o v e r the details or the manner of the other's performance of its obligations h e r e u n d e r , except as specified in this Agreement. S i m p l o t disputes that this provision controls and points to the fact that Paragraph 7 also a l l o w s the parties to "control the details or manner of each other's performance `as s p e c i f i e d in this Agreement.'" (Dkt. No. 52, p. 24). Further, Simplot argues this

p r o v i s i o n does not control the question of whether a joint venture exists. While the C o u r t agrees that this single provision alone is not dispositive of the question, it s u p p o r t s the conclusion that the terms of the Distribution Agreement do not allow for t h e parties to share joint control. The "checks and balances" pointed to by Simplot to s u p p o r t its contention are normal review rights and duties of each party to assure itself t h a t the terms of the contract were being met such as: auditing the books of the other, r e q u i r i n g regular statements and forecasts, along with periodic meetings. These terms o f the contracts, however, do not give way to any legal right of either party to control t h e operations or assets of the other. Instead, they merely provide a means for each of t h e businesses to assure they were each receiving that which they were entitled to under t h e agreements. Each business made its own decisions and exercised control over its o w n business; there was no ability of either to control the other.

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3.

S h a r i n g Losses

A g a i n pointing to the Distribution Agreement, Nestle argues that Simplot had no d u t y to share in losses. Paragraph 3 of the Distribution Agreement, Nestle asserts,

r e q u i r e s Nestle to pay Simplot in full for all of its costs at all times and, thus, Simplot w a s entitled only to share in the net profits from Nestle's resale of the dehydrated potato p r o d u c t s but there is no contract term imposing a duty upon Simplot to share in any l o s s e s . (Dkt. No. 58, p. 28). Simplot argues that an express provision for the sharing of losses is not required. ( D k t . No. 52, p. 19). In support of this proposition, Simplot cites to cases from

C a l i f o r n i a , Idaho, Utah, and 51 A.L.R.4th 371. In Delaware, the duty to share in losses i s an element required for a joint venture. See Warren, 414 A.2d at 509. Though some j u r i s d i c t i o n s may imply an agreement to share losses, that is not the case here. See 46 A m . J u r . 2 d Joint Ventures § 67 (Sept. 2008). Simplot points to the Distribution A g r e e m e n t ' s definition of "dehydrated profits" to be net revenue minus costs which w o u l d result in losses where the allowable costs exceed the net revenue. (Dkt. No. 52, p . 21). Simplot also points to the June 30, 2004 statement from Nestle which reported a l o s s and argues that Nestle sent a demand for reimbursement to Simplot for the loss. T h i s evidence goes to the parties course of performance and may be properly c o n s i d e r e d . On this point, the Court finds genuine issues of material fact exist as to w h e t h e r the parties shared in the losses. However, because Simplot has failed to

d e m o n s t r a t e joint ownership of assets or ability to control the other party, it has failed to p r o v i d e facts to support its claim of a joint venture regardless of whether the parties s h a r e d in losses.

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4.

Conclusion

T h e contracts define the business dealings of the parties over the course of a few y e a r s . The parties were engaged in an on-going business relationship involving the m a n u f a c t u r i n g , producing, and selling of potato products for profit. However, the fact t h a t two business entities entered into a contractual relationship with one another and b o t h obviously desired to profit from the relationship does not evidence a joint venture. J u s t the opposite is true in this case. The language of the contracts has the effect of m a i n t a i n i n g the separateness of the two businesses. Each party has separate rights and d u t i e s owed to and from the other party. The "checks and balances," referred to by S i m p l o t , are reciprocating duties and rights commonly seen in business contracts. The f a c t that each party had to give and take under the contract goes to show that they were n o t on the same team, as with a joint venture, but instead on opposing sides of a teetert o t t e r seeking to strike a profitable balance for both businesses. The parties were not a b l e to control the actions of the other that may have thrown off the balance between the t w o . Each acted independently. There were no jointly owned assets and neither party h a d the right or ability to control the policies or conduct of the other. Further, the profit s h a r i n g scheme did not expressly require the sharing of losses, however, there is a d i s p u t e d question of material fact as to this element. Simplot's contract interpretation points only to its own interests and concerns. M a i n l y , the retaining of the dehydrated potato products profit stream by assuring the c o n t i n u a t i o n of the sales of both the Trio label and Idahoan products. Noticeably absent f r o m this argument are the interests and concerns of Nestle. This omission in Simplot's c o n t r a c t interpretation weighs against finding the existence of a joint venture. The

p a r t i e s did not have a unified purpose but instead remained separate business entities MEMORANDUM ORDER - 16

e n g a g e d in an ongoing business relationship. Because the unambiguous contract terms e v i d e n c e no joint ownership of assets or control, the Court concludes that there was no j o i n t venture between the parties in this case. Simplot also argues that the "joint venture imposed certain obligations on the p a r t i e s in addition to those provided by their written agreements, and such obligations w e r e not negated by those agreements." (Dkt. No. 52, p. 16). However, Simplot cannot i n v o k e the implied covenant where the parties have a written contract expressly c o v e r i n g the terms or issue allegedly breached or violated. Allied Capital Corp. v. GCS u n Holdings, L.P., 910 A.2d 1020, 1032-33 (Del. Ch. 2006) (citing Shenandoah Life I n s . Co. v. Valero Energy Corp., 1988 WL 63491, at *8 (Del. Ch. 1988) (noting that w h e r e "a specific, negotiated provision directly treats the subject of the alleged wrong a n d has been found to have not been violated, it is quite unlikely that a court will find by i m p l i c a t i o n a contractual obligation of a different kind that has been breached")); see a l s o Storek & Storek, Inc. v. Citicorp Real Estate, Inc. 100 Cal.App.4th 44, 55 (Cal.App. 2 0 0 2 ) ( "an implied covenant of good faith and fair dealing cannot contradict the express t e r m s of a contract."). The contracts between Nestle and Simplot do not support finding t h e existence or formation of a joint venture. Further, the express terms of the contracts c o n t r o l . As such, Simplot's theory of the case and all of the claims upon which it is b a s e d fail as a matter of law and the motion for summary judgment is proper. C. C o u n t Three: Breach of the Implied Covenant of Good Faith and Fair Dealing C o u n t Three of the second amended complaint alleges: N e s t l e was contractually obligated to deal with Simplot and conduct the B u s i n e s s honestly and with the observance of reasonable commercial s t a n d a r d s of fair dealing in the trade...to refrain from engaging in any MEMORANDUM ORDER - 17

c o n d u c t that was inconsistent with the parties' legitimate expectations, w a s objectively unreasonable, or violated nullified or significantly i m p a i r e d Simplot's rights and obligations under the terms of the parties' agreements. N e s t l e ' s wrongful conduct of the Business...included engaging in the p r a c t i c e of excessive "trade loading" and its providing unjustifiable cost r e d u c t i o n s to certain customers during the six month period ending June 3 0 , 2004...constituted a breach of the implied covenants of good faith and f a i r dealing contained within the parties' agreements. ( D k t . No. 39, p. 8). 6 This claim is centered around the last six months before Nestle e x i t e d the dehydrated potato products business and Nestle's dealings with Sysco. In the s p r i n g of 2003, Simplot argues Nestle gave customer discounts and engaged in trade l o a d i n g , primarily to Sysco, that Simplot maintains negatively impacted its profitability a n d eventually resulted in Simplot losing Sysco's business. (Dkt. No. 52, pp. 34-35). Nestle argues it did not breach the implied covenant of good faith and fair dealing a s to the Asset Purchase Agreement which provided for the sale of four assets from N e s t l e to Simplot and the agreement as to the limited license for Simplot to use the Trio trademark. (Dkt. No. 58, p. 15-16). Nestle points out that the Asset Purchase

A g r e e m e n t is "silent" as to any of Simplot's arguments regarding "trade loading" or " c u s t o m e r discounts" as these matters are addressed by the Distribution Agreement. ( D k t . No. 58, p. 16). Because Nestle performed all of its obligations under the Asset P u r c h a s e Agreement, it argues, summary judgment is proper. As to the Distribution A g r e e m e n t , Nestle argues it did not breach the implied covenant because the express t e r m s of the contract allowed Nestle to give customer discounts, promotions, and incentives.

6

The second amended complaint uses the term "the Business" as being the "joint efforts of Simplot and N e s t l e in the distribution of dehydrated potato products processed at the Moses Lake plant purchased from N e s t l e by Simplot ... and the sharing of profits and losses regarding the same." (Dkt. No. 39, p. 3).

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A s stated above, Simplot cannot invoke the implied covenant where the parties h a v e a written contract expressly covering the terms or issue allegedly breached or v i o l a t e d . Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1032-33 (Del. C h . 2006) (citing Shenandoah Life Ins. Co. v. Valero Energy Corp., 1988 WL 63491, at * 8 (Del. Ch. 1988) (noting that where "a specific, negotiated provision directly treats t h e subject of the alleged wrong and has been found to have not been violated, it is quite u n l i k e l y that a court will find by implication a contractual obligation of a different kind t h a t has been breached")); see also Storek & Storek, Inc. v. Citicorp Real Estate, Inc. 1 0 0 Cal.App.4th 44, 55 (Cal.App. 2002) ( "an implied covenant of good faith and fair d e a l i n g cannot contradict the express terms of a contract."). Summary judgment is

a p p r o p r i a t e on this claim because the actions allegedly making up the breaches of the i m p l i e d covenant are covered by the express terms of the contracts. T h e terms of the Asset Purchase Agreement provided for Nestle's withdraw from t h e dehydrated potato products business by way of the sale of four of Nestle's assets to S i m p l o t in addition to the limited license to use the Trio trademark. The Asset Purchase A g r e e m e n t did not address the manner in which Nestle was to distribute the dehydrated p o t a t o products. The parties' agreement as to the distribution of the products by Nestle w a s encompassed in the Distribution Agreement. Paragraph 5 of the Distribution

A g r e e m e n t allowed for Nestle to control the marketing, sale, and distribution of d e h y d r a t e d potato products under the contract and provided for the profit sharing s t r u c t u r e between the parties. Simplot acknowledges that it "delegated primary (Dkt. No.

r e s p o n s i b i l i t y for managing marketing, sales and distribution to Nestle...."

5 2 , p. 22). As such, Nestle acted in accordance with its obligations and rights under the e x p r e s s terms of the contracts and, in doing so, did not violate the implied covenant. MEMORANDUM ORDER - 19

T h e real basis for Simplot's breach of the implied covenant claim is its allegation t h a t Nestle breached the implied covenant as to the joint venture that Simplot argues e x i s t e d . Contending that Nestle "breached the covenant of good faith and fair dealing, a n d therefore the joint venture contracts between the parties." (Dkt. No. 52, p. 35); see a l s o (Dkt. No. 52, p. 22) ("The expectation of the parties was clearly to cooperate in g o o d faith to maximize profits of the business, and to consult with one another on all m a j o r issues and decisions affecting the business's profitability, regardless [of] whether s u c h decision involved sales, distribution or manufacturing issues."). Nestle argues that n e i t h e r the Asset Purchase Agreement nor the Distribution Agreement created a joint v e n t u r e . 7 (Dkt. No. 58, p. 33). Because the Court has determined above that no joint v e n t u r e was created, there is no claim for breach of the implied covenant based on any j o i n t venture. III. M o t i o n to Strike S i m p l o t has filed a motion to strike the affidavit of John O. Murphy or, a l t e r n a t i v e l y , to strike inadmissable portions of the affidavit including the attached exhibits. The motion is made pursuant to Federal Rule of Civil Procedure 56(e).

S i m p l o t argues Mr. Murphy has "no personal knowledge of the matters contained in the v o l u m i n o u s attachments to his Affidavit, and has made no showing that he is competent
The Asset Purchase Agreement is governed by California law which employ similar standards for d e t e r mi n i n g the existence of a joint venture as Delaware. "A joint venture is an undertaking by two or mo r e persons jointly to carry out a single business enterprise for profit." Weiner v. Fleischman, 816 P.2d 8 9 2 , 895 (Cal. 1991) (citation omitted). "Like partners, joint venturers are fiduciaries with a duty of d i s c l o s u r e and liability to account for profits." "The elements necessary for the creation of a joint venture a r e : (1) joint interest in a common business; (2) with an understanding to share profits and losses; and (3) a r i g h t to joint control." April Enterprises, Inc. v. KTTV, 147 Cal.App.3d 805, 819 (Cal.App. 1983) (citation o mi t t e d ) ; see also Scottsdale Ins. Co. v. Essex Ins. Co., 98 Cal. App.4th 86, 91 (Cal. App. 2002) (quoting O r o s c o v. Sun-Diamond Corp., 51 Cal.App.4th 1659, 1666 (1997) ("There are three basic elements of a j o i n t venture: the members must have joint control over the venture (even though they may delegate it), t h e y must share the profits of the undertaking, and the members must each have an ownership interest in the e n t e r p r i s e . " ) . "An agreement to `go into business' of itself does not imply a joint venture or any specific t y p e of operation." Myers v. Gager, 346 P.2d 251, 255 (Cal.App. 1959) (citation omitted).
7

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t o testify...as to those matters" or that he is "able to provide the necessary foundation for t h e i r admissibility" and because numerous statements in the affidavit contradict Mr. M u r p h y ' s prior deposition testimony. (Dkt. No. 54, pp. 1-2). Nestle claims the

f o u n d a t i o n is proper because Mr. Murphy gained personal knowledge of the facts set f o r t h in the affidavit by reviewing Nestle's business records. (Dkt. No. 61). Simplot r e b u t s contending that the statements are inadmissible hearsay, conclusions, and violate t h e best evidence rule. (Dkt. No. 64). Because the Court did not rely upon Mr.

M u r p h y ' s affidavit in ruling on this motion, the motion to strike is moot. ORDER B a s e d on the foregoing, the Court HEREBY ORDERS as follows: 1) 2) D e f e n d a n t ' s Motion for Summary Judgment (Dkt. No. 42) is GRANTED. P l a i n t i f f ' s Motion to Strike (Dkt. No. 54) is MOOT.

D A T E D : March 4, 2009

Honorable Edward J. Lodge U . S. District Judge

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