Carhartt, Inc. v. Innovative Textiles, Inc.
Filing
53
OPINION and ORDER Denying in Part and Granting in Part Gentry Mills, Inc's 39 Motion for Reconsideration. Signed by District Judge Judith E. Levy. (SBur)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
Carhartt, Inc.,
Plaintiff,
Case No. 17-cv-13604
v.
Judith E. Levy
United States District Judge
Innovative Textiles, Inc.,
Defendant/ThirdParty Plaintiff,
Mag. Judge R. Steven
Whalen
v.
Gentry Mills, Inc.,
Third-Party
Defendant.
________________________________/
OPINION AND ORDER DENYING IN PART AND
GRANTING IN PART GENTRY MILLS, INC.’S
MOTION FOR RECONSIDERATION [39]
Innovative Textiles, Inc. (“ITI”) filed a third-party complaint
against Gentry Mills, Inc. (“GMI”) alleging that GMI is liable for claims
arising from a contract dispute brought by Carhartt, Inc. (“Carhartt”)
against ITI. GMI successfully moved to dismiss Innovative Textiles’ first
third-party complaint based on pleading deficiencies. The Court granted
leave for ITI to file an amended third-party complaint. GMI asks the
Court to reconsider, arguing that ITI’s amendments are futile.
I.
Background
An outline of this case is explained in the Court’s previous opinion
and order granting third-party defendant, GMI’s Motion to Dismiss.
(Dkt. 33.) In short, Carhartt initially sued third-party plaintiff, ITI, for
breach of contract based on ITI’s failure to sell it sufficiently fire-resistant
fabric as specified in an agreement. ITI then filed a third-party complaint
against GMI alleging that GMI failed to properly treat the fabric ITI
eventually sold to Carhartt. (Dkt. 8.) The original third-party complaint,
which contained very few factual allegations, was dismissed pursuant
Fed. R. Civ. P. 12(b)(6). (Dkt. 33.) GMI’s current motion for
reconsideration challenges the order granting ITI’s motion for leave to
amend and file an amended third-party complaint. (Dkt. 39.)
As set forth in the July 16, 2018 order granting leave to amend (Dkt.
36), the amended third-party complaint includes a much more developed
set of factual allegations. ITI has set forth its relationship with GMI and
detailed the specifications regarding the chemicals and treatment it
2
purchased from GMI. The new factual allegations are explored in more
detail, as relevant, in the discussion below. (Dkt. 36.)
The amended third-party complaint also includes additional causes
of action. The eight counts are now: breach of contract for the sale of goods
(Count I); breach of express warranties (Count II); breach of implied
warranties (Count III); violation of North Carolina UCC § 25-2-314
requiring merchantable goods (Count IV); violation of implied warranty
of fitness for a particular purpose (Count V); breach of contract (Count
VI); negligence (Count VII); and indemnification implied-in-law (Count
VIII). The Court’s current review of the amended third-party complaint
is limited the to the issue of futility, as set forth in an earlier order. (Dkt.
41.)
II.
Standard of Review
To prevail on a motion for reconsideration under Local Rule 7.1, a
movant must “not only demonstrate a palpable defect by which the court
and the parties and other persons entitled to be heard on the motion have
been misled but also show that correcting the defect will result in a
different disposition of the case.” E.D. Mich. LR 7.1(h)(3). “A ‘palpable
defect’ is a defect that is obvious, clear, unmistakable, manifest or plain.”
3
Witzke v. Hiller, 972 F. Supp. 426, 427 (E.D. Mich. 1997) (citations
omitted).
When a party seeks to amend after a responsive filing, “leave shall
be freely given when justice so requires.” Fed. R. Civ. P. 15(a). But a
“court need not grant leave to amend, however, where amendment would
be ‘futile.’” Miller v. Calhoun Cty., 408 F.3d 803, 817 (6th Cir. 2005)
(quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). “Amendment of a
complaint is futile when the proposed amendment would not permit the
complaint to survive a motion to dismiss.” Id. (citing Neighborhood Dev.
Corp. v. Advisory Council on Historic Pres., 632 F.2d 21, 23 (6th Cir.
1980)). Thus, the Court reviews the amendments under the same
standard as if there were a pending motion to dismiss.
Fed. R. Civ. P. 12(b)(6) requires the Court to “construe the
complaint in the light most favorable to the plaintiff and accept all
allegations as true.” Keys v. Humana, Inc., 684 F.3d 605, 608 (6th Cir.
2012). “To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that
is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A
plausible claim need not contain “detailed factual allegations,” but it
4
must contain more than “labels and conclusions” or “a formulaic
recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007).
III. Discussion
a. Breach of Contract [Counts I & VI]
ITI’s amended third-party complaint includes two counts for breach
of contract. Count I will be dismissed as duplicative. Moran v. Ruan
Logistics, 1:18-cv-223, 2018 U.S. Dist. LEXIS 159648, at *7 (S.D. Ohio
Sept. 18, 2018). ITI does not oppose dismissal of Count I. (Dkt. 50 at 4.)
Only Count VI’s claim for breach of contract for goods and services
remains.
Under North Carolina law1, a party alleging breach of contract
must demonstrate “(1) the existence of a valid contract and (2) breach of
the terms of the contract.” Martinez v. Univ. of N. Carolina, 223 N.C.
App. 428, 432 (2012) (quoting Long v. Long, 160 N.C. App. 664, 668
(2003)). ITI’s first third-party complaint failed on both prongs. ITI failed
to allege sufficient facts as to either the existence of a valid contract or
North Carolina law governs the alleged contracts. The reasoning for this is
set forth in detail in the Court’s opinion and order dismissing the original third-party
complaint. (Dkt. 33 at 3-5.)
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the contractual obligations and manner of breach. In its amended thirdparty complaint, ITI cures this deficiency.
i. Nature of the Contract
Because the existence of a contract depends on the applicable law,
and the applicable law is determined by the nature of the contract, the
Court must first examine the basic nature of the alleged contract at issue.
1. Implied or Express Contract
At law, a contract is either express or implied. ITI claims it “entered
into an implied and express contract.” (Dkt. 37 at 21 (emphasis added).)
But “where there is an express contract between parties, there can be no
implied contract between them covering the same subject matter dealt
with in the express agreement.” Snyder v. Freeman, 300 N.C. 204, 218
(1980). In this case, the purchase orders serve as the contractual offer
that was purportedly accepted through performance. Because the
purchase orders are the operative set of terms, there can be no implied
contract dealing with the “same subject matter.” See id. ITI’s alleged
contracts with GMI are express.
2. Contract for Goods or Services: Predominant
Factor
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Whether the alleged contract is for goods or for services dictates
whether the UCC will apply. As pleaded, the alleged contract is “for goods
and services.” When an agreement between two parties contains both
goods and services, a contract’s “predominant factor” or its “purpose,
reasonably stated” will determine whether the UCC applies. Hensley v.
Ray's Motor Co., 158 N.C. App. 261, 265 (2003). To determine the nature
of the contract, a court asks whether a contract “is the rendition of
service, with goods incidentally involved . . . or is a transaction of sale,
with labor incidentally involved.” Id. This is sometimes called the
“predominant factor test.” Id. To determine the “thrust” of the contract,
courts may look to contract language, the general nature of supplier’s
business, and the comparative worth of goods versus services. Id. at 266.
ITI’s initial complaint failed to allege predominantly goods were
involved. The Court stated that “the complaint makes no mention of the
chemical sales that ITI contends is the ‘predominant factor’ of the parties’
agreement.” (Dkt. 33 at 11.) In its amended third-party complaint, ITI
still does not sufficiently allege a sales contract. Although ITI now makes
references to “chemical goods,” the contract pleaded is predominantly for
services.
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The amended third-party complaint states that “ITI contracted
with GMI for the selection, purchase and application of several chemical
additives to be used on the flame-resistant fabric that was ultimately sold
to Carhartt.” (Dkt. 37 at 3.) The details set forth in the amended
complaint reveal the “thrust” of the contract. GMI was a “supplier of . . .
finishes,” and was given “pre-treated fabric” to be “finished.” (Id. at 4.)
“After the finish process was complete,” GMI would then send some of
the “finished fabric” to a testing lab and the remainder to Carhartt. (Id.
at 4-5.) Through these allegations, it is evident that, to the extent
chemicals were purchased, they were incidental to the finishing process.
Therefore, the contract’s “purpose, reasonably stated,” under the wellpleaded facts, “is the rendition of service, with goods incidentally
involved.” See Hensley, 158 N.C. App. at 265.
ITI relies heavily on the language in the purchase orders to argue
that the underlying contract as one for goods. It points to the words
“item,” “quantity,” and “description” to suggest that the predominant
purpose was to purchase goods. (Dkt. 42 at 17.) This is not persuasive.
The purchase orders also contain the words “finish” and “Dye Color”
within the description, with specification for a “finished weight” and
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“finished width.” (Dkt. 37-3 at 2.) Other description sections indicate to
GMI: “DO NOT PUT DWR FINISH ON THIS ROLL” and “this roll is to
be slit, dried on the santex and framed.” (Id. at 3.) Moreover, the fabric
itself was not provided by GMI. Rather, “GMI[ ]applied the chemical
additives to ITI’s fabric.” (Dkt. 37 at 4 (emphasis added).) The selection
of chemicals to be applied to the fabric is not a sale of goods. Nor does the
addition of the word “goods” each time ITI pleads chemicals in the
amended complaint convert the pleaded contract into one for goods as a
matter of law.
This conclusion aligns with many cases, which hold that contracts
for the processing of or application of chemicals to goods, where there is
no actual exchange of or only incidental use of materials, are
predominantly for the provision of services. E.g., IMI Norgen Inc. v. D&D
Tooling & Mfg., No. 00 C 5789, 2003 U.S. Dist. LEXIS 10875, at *6, 9-10
(N.D. Ill. June 25, 2003) (The UCC did not apply to a contract with a
company to “heat treat . . . lever parts” because the contract was to
“service goods” and not to “sell goods.”); Landtek Grp., Inc. v. N. Am.
Specialty Flooring, Inc., No. 14-1095, 2016 U.S. Dist. LEXIS 107945, at
*121-25 (E.D.N.Y. Aug. 12, 2016) (Provision of asphalt and construction
9
materials was incidental to the contract to install the flooring, and the
UCC did not apply.); Manes Org., Inc. v. Standard Dyeing & Finishing
Co., 472 F. Supp. 689, 690 n. 3 (S.D.N.Y. 1979) (finding that the “essence
of the agreement” for a “fabric-dyeing-and-finishing contract” was
predominantly for services, to which the “change in physical custody of
the raw goods . . . was incident to a bailment and not a sale”); Epstein v.
Giannattasio, 25 Conn. Supp. 109, 112-14 (Conn. Super. Ct. 1963)
(dismissing a warranty claim where the complaint alleged a contract “for
the purpose of receiving a beauty treatment,” which was for services,
explaining that the “materials used in the performance of those services
were patently incidental to that subject, which was a treatment and not
the purchase of an article”). There are no binding North Carolina cases
on point. Nor does plaintiff provide additional persuasive authority
involving chemical application contracts on which the Court can rely.
Therefore, the above cases are instructive.
The closest case that held a contract to apply chemicals was
predominantly for goods does not apply to the facts pleaded here. In it, a
farmer purchased expensive herbicides from a store and hired the store
to apply the chemicals to his fields. Southern State Coop. v. Townsend
10
Grand & Feed Co., 163 B.R. 709, 719 (Bankr. D. Del. 1994). But the
“charges for the herbicides themselves were roughly ten times greater
than the spraying charge” and the application was conducted only after
a transfer of the chemicals to the farmer. Id. This case is easily
distinguishable. Here, there is no allegation that that the chemicals were
first delivered to ITI – they were not – nor an allegation or indication on
the purchase orders that the value of the “chemical goods” outweighed
the value of the application and curing processes described in the
complaint.
Instead, even in the light most favorable to ITI, the well-pleaded
facts in the amended third-party complaint do not plausibly set forth a
contract predominantly for goods. The amended complaint sets forth the
clear nature of the agreement: chemical treatment of fabric. The “change
in physical custody of the [fabric]” was incidental, see Manes Org., Inc.,
472 F. Supp. at 690 n. 3, and did not constitute a sale. Rather, the
application of the correct chemical and proper curing processes is at issue
in the amended third-party complaint. For instance, the third-party
party complaint outlines machinery and equipment failures in “heating
zones” that resulted in “inconsistencies and variations in the chemical
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and application and curing process.” (Dkt. 37 at ¶¶ 33-34.) In total, these
allegations reveal that the contract was predominantly for the provision
of fabric treatment and processing, which are services.
ii. Existence of a Contract
Nonetheless, ITI has cured the earlier deficiencies related to its
breach of contract claim, because it has pleaded sufficient facts to
plausibly establish the existence of contracts for services. North Carolina
law holds that the “well-settled elements of a valid contract” are “offer,
acceptance, consideration, and mutuality of assent to the contract’s
essential terms.” Se. Caissons, LLC v. Choate Constr. Co., 247 N.C. App.
104, 110 (2016). “Acceptance by conduct is a valid acceptance.” Snyder,
300 N.C. at 218.
The amended third-party complaint sets forth facts related to each
of these elements. First, ITI provided offers through purchase orders.
True, the mere existence of purchase orders without demonstration of
affirmative assent from GMI is not sufficient to allege the existence of a
contract. See Southern Spindle & Flyer Co. v. Milliken & Co., 281 S.E.2d
734, 736 (N.C. App. 1981). But ITI pleads that “GMI accepted ITI’s
contractual offer via GMI’s conduct,” by selling and applying the finishes
12
to the fabrics, and shipping the finished product to Carhartt, Inc. and to
an outside party for testing. (Dkt. 37 at 22.) Finally, the details of
“[w]hether mutual assent is established and whether a contract was
intended between the parties are questions for the trier of fact,” see
Creech v. Melnik, 347 N.C. 520, 527 (1998). But taking the allegations in
the amended complaint as true, there was mutual assent.
iii. Manner of Breach
The second prong of a breach of contract claim is the actual manner
of “breach of the terms of the contract.” Martinez, 223 N.C. App. at 432.
In its amended complaint, ITI also cures deficiencies regarding the
contractual obligations and manner of the alleged breach.
In broad
terms, ITI alleges that the purchase orders specify the type of flame
resistant material to be used and stats that GMI failed to include the
necessary additive. GMI disagrees, arguing that there are no allegations
in the amended third-party complaint or indications in the purchase
orders that the treatment must include a flame-resistant additive.
The allegations are sufficient to allege a breach of contract. ITI
states that GMI failed “to sell a durable water repellant finish that
included a flame-resistant additive” as indicated on the purchase orders.
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(Dkt. 37 at 13, 23) ITI specifically alleges that various specifications, such
as “F12” or “Protex C modacrylic fibers,” are flame resistant fibers that
correspond to the need for flame resistant additives in its chemical
finishes. (Id. at 4, 21-22.) These allegations must be accepted as true at
this stage of the case. Therefore, ITI sufficiently pleads the manner of
breach.
Purchase order, payment, and delivery is enough to plausibly allege
the elements of a contract. And although the exact nature and outlines of
the contract are disputed, ITI plausibly alleges a breach of contract for
chemical application services. The amended third-party complaint is not
futile as to Count VI. For this reason, there was no defect in the Court’s
decision to allow ITI to amend its third-party complaint to include Count
VI.
b. Breach of Warranty [Counts II-V]
As a threshold matter, warranty claims, whether express or
implied, require that a contract be for the sale of goods. See Everts v.
Parkinson, 147 N.C. App. 315, 330 (2001) (“[A]n express warranty is a
promise made by a seller to a buyer which relates to the title, condition
or quality of goods.” (quoting John N. Hutson, Jr. and Scott A. Miskimon,
14
North Carolina Contract Law § 15-2, at 698 (2001)); Boudreau v.
Baughman, 322 N.C. 331, 336 (1988) (“[A]ctions for breach of implied
warranty are now governed by the Uniform Commercial Code, adopted
in North Carolina in 1965 as chapter 25 of the General Statutes.”
(citations omitted)). GMI argues that all of ITI’s warranty claims fail,
because the alleged contract was not for goods, but was for services. (Dkt.
39 at 15-16.)
As set forth above, the contract is predominantly for services and
therefore all warranty claims, both express and implied, fail as a matter
of law. The amendment is therefore futile as to Counts II-V. There was a
palpable defect in allowing these counts to go forward and therefore they
are dismissed.
c. Negligence
ITI’s claim for negligence is futile under North Carolina’s economic
loss rule.
North Carolina's economic loss rule is born out of the principle
that “a breach of contract does not give rise to a tort action by
the promisee against the promisor.” The rule provides
“limitations on the recovery in tort when a contract exists
between the parties that defines the standard of conduct and
which the courts believe should set the measure of recovery.”
15
Provectus Biopharmaceuticals, Inc. v. RSM US LLP, No. 17 CVS 10396,
2018 NCBC LEXIS 101, at *51-52 (N.C. Super. Ct. September 28, 2018)
(quoting N.C. State Ports Auth. v. Lloyd A. Fry Roofing, Co., 294 N.C. 73,
81 (1978); Akzo Nobel Coatings, Inc. v. Rogers, No. 11 CVS 3013, 2011
NCBC LEXIS 42, at *47-48 (N.C. Super. Ct. Nov. 3, 2011)). “To maintain
a tort claim for conduct also alleged to be a breach of contract, the
plaintiff must show a duty owed by the defendant separate and distinct
from any duty owed under a contract.” Id. (quotations and citations
omitted). ITI does not plead any tort claim outside ITI’s breach of contract
claim. Rather, all of its claims lie in the repeated allegation that GMI
“agreed to provide ITI with goods and services that complied with the
purchase orders.” These allegations serve as the basis of ITI’s breach of
contract claim, and therefore cannot serve as the basis of an independent
negligence claim. For this reason, the proposed amendments related to
the negligence claim contained in Count VII are futile. The Court
committed a palpable defect allowing the amended third-party complaint
to go forward with respect to this claim and it is therefore dismissed.
d. Indemnity Implied in Law
16
Indemnity implied-in-law is “more an equitable remedy than an
action in and of itself,” Kaleel Builders, 161 N.C. App. at 41, and is a
“legal fiction used to avoid unfairness.” Carl v. State, 192 N.C. App. 544,
558 (2008) (quoting Ne. Solite Corp., 102 F. Supp. 2d at 641). “For
indemnification implied-in-law . . . North Carolina law requires there be
an underlying injury sounding in tort.” Kaleel Builders, 161 N.C. App. at
41; see also CBP Res., Inc. v. SGS Control Servs., Inc., 394 F. Supp. 2d
733, 741 (M.D.N.C. 2005) (“Defendant is correct that both implied-in-law
indemnity and contribution require an underlying tort injury.”).
When “indemnity implied-in-law arises from an underlying tort . . .
a passive tort-feasor pays the judgment owed by an active tort-feasor to
the injured third-party.” Kaleel Builders, 161 N.C. App. at 39. Often
described as “primary and secondary liability,” an active tortfeasor is
required to pay a judgment on behalf of a passive tortfeasor when:
(1) they are jointly and severally liable to the plaintiff; and (2)
either (a) one has been passively negligent but is exposed to
liability through the active negligence of the other or (b) one
alone has done the act which produced the injury but the other
is derivatively liable for the negligence of the former.
CBP Res., Inc. v. SGS Control Servs., Inc., 394 F. Supp. 2d 733, 746
(M.D.N.C. 2005) (quoting Edwards v. Hamill, 262 N.C. 528, 531 (1964)).
17
ITI’s indemnity-in-law claim fails because it no longer has an
underlying injury sounding in tort. The North Carolina Court of Appeals
explains why a contractual dispute, alone, cannot serve as the basis for
indemnity implied-in-law:
Because [the defendants] are accountable in their contract with
[plaintiff], [plaintiff] does not have a claim in tort against
[defendants], and therefore, ‘the parties do not fit the active-passive
tort-feasor framework required to support an equitable right to
indemnity implied-in-law[.]’
Frye Reg’l Med. Ctr. v. Hostetter & Keach, Inc., No. COA13-313, 2013 N.C.
App. LEXIS 1300, at *17 (2013) (quoting Kaleel, 161 N.C. App. at 47).
Here, ITI alleges a contractual dispute and provides no other plausible
injury upon which to base its indemnity implied-in-law claim. Therefore,
the amended third-party is futile and the Court committed error allowing
this claim to be amended. Count VIII is dismissed.
IV.
Conclusion
ITI’s amended third-party complaint cures defects contained in its
primary claim: breach of contract. However, the other counts fail to set
forth plausible claims. Because many of the amendments permitted in
the Court’s initial grant of leave were, in fact, futile, GMI has
demonstrated palpable defect with respect to the remaining counts.
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GMI’s motion for reconsideration is hereby GRANTED as to Counts I, II,
III, IV, V, VII, and VIII. The Motion is DENIED as to Count VI.
IT IS SO ORDERED.
Dated: December 4, 2018
Ann Arbor, Michigan
s/Judith E. Levy
JUDITH E. LEVY
United States District Judge
CERTIFICATE OF SERVICE
The undersigned certifies that the foregoing document was served
upon counsel of record and any unrepresented parties via the Court’s
ECF System to their respective email or First Class U.S. mail addresses
disclosed on the Notice of Electronic Filing on December 4, 2018.
s/Shawna Burns
SHAWNA BURNS
Case Manager
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