Dakota Style Foods, Inc. v. SunOpta Grains and Foods, Inc.

Filing 58

ORDER denying 34 Motion for Summary Judgment; denying 28 Motion for Partial Summary Judgment. Signed by U.S. District Judge Charles B. Kornmann on July 10, 2018. (DLC)

UNITED STATES DISTRICT COURT

JUL 1 1 2018

DISTRICT.OF SOUTH DAKOTA
NORTHERN DIVISION

DAKOTA STYLE FOODS,INC.;

1:16-CV-01036-CBK

Plaintiff,
vs.

ORDER

SUNOPTA GRAINS AND FOODS,INC.,
Defendant.

BACKGROUND

Dakota Style Foods, Inc.("Dakota Style") filed sued against SunOpta Grains and Foods,
Inc.,("SunOpta")to recover damages incurred by Dakota Style as a result of SunOpta's recall of

shelled sunflower kernels. SunOpta voluntarily recalled roasted simflower kernel products due to
the potential presence of listeria monocytogenes on May 2, 2016, May 18,2016, and May 31,
2016. The recall ultimately covered approximately one year's products sold to Dakota Style.^
Dakota Style filed claims for strict products liability, negligence, breach ofimplied warranties,
breach ofexpress warranties, breach of contract, and declaratory judgment in state court. On
August 12, 2016 SunOpta removed the case to federal court and on December 13, 2016 this court

dismissed Dakota Style's claims for strict products liability, negligence, and declaratory
judgment. SunOpta filed an answer to plaintiffs complaint, which included counterclaims for

breach of sales contract, breach of contract,imjust enrichment, conversion, promissory estoppel.

'
This court notes that there appears to be an inconsistency between the product recalled on the recall notices
submitted by the parties and that alleged by Dakota Style in Kevin Dandurand's affidavit. The recall notices indicate

that product supplied to Dakota Style between May 31,2015, and April 20, 2016, was recalled. Kevin Dandurand's
affidavit states that product was recalled between January 31,2015, and February 1, 2016.

and fraud related to plaintiffs alleged failure to pay its outstanding balance with SunOpta Or
verify that product for which plaintiff was reimbursed by SimOpta was subject to recall.
On May 1, 2018, plaintifffiled a motion for partial summary judgment and defendant
filed a motion for summary judgment. Plaintiffrequests summary judgment for breach of

contract and breach ofimplied and express warranties and requests that SunOpta's counterclaims
be dismissed. SunOpta objects to plaintiffs request, arguing, inter alia, that Dakota Style has
sustained no damages as the majority of product was sold to the end consumer and paid for by
Dakota Style's customers,that the bulk ofproduct delivered to Dakota Style was not
contaminated by listeria monocytogenes, and that there is a factual dispute as to whether product
specifications were included in the parties' contracts and whether SunOpta knew that Dakota
Style used its sunflower kernels for human consumption.

Defendant-requests summary judgment on Dakota Style's claim for consequential
damages, Dakota Style's outstanding balance to SunOpta, the purchase price of kernel product
not covered by the recall, and for the purchase price of product covered by the recall which

SunOpta alleges Dakota Style already sold. Dakota Style objects to defendant's request, arguing,
inter alia, that Dakota Style is a third-party beneficiary of SunOpta's insurance contract, that

limiting damages to the purchase price is unconscionable, that Dakota Style was forced to
reimburse merchants for the defective products, and that Dakota Style is entitled to set-offfor its
outstanding balance.

Both parties request oral argument on their summary judgment motions. Because the

court is able to resolve the pending motions for summaryjudgment without oral argument, the
requests for oral argument should be denied.

DECISION
L Standard of Review

The purpose ofsummary judgment is to determine whether there is a "genuine issue for

trial" with regard to a claim or defense or "part of each claim or defense." Matsushita Elec.
Indus. Co., Ltd. v. Zenith Radio Corp..475 U.S. 574,587(1986); Fed. R. Civ. P. 56(a).
Summaryjudgment should be granted only where there is "no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter oflaw." Fed. R. Civ. P. 56(a). Iffacts are
disputed,"[ojnly disputes over facts that might affect the outcome ofthe suit under the
governing law will properly preclude the entry ofsummary judgment." Anderson v. Libertv

Lobby. Inc.. 477 U.S. 242,248(1986). The moving party bears the burden ofshowing that the
material facts in the case are undisputed and "inferences to be drawn from the underlying facts
. . . must be viewed in the light most favorable to the party opposing the motion." Celotex Corp.
V. Catrett. 477 U.S. 317, 322-23 (1986); United States v. Diebold. Inc.. 369 U.S. 654,655(1962)
(per curiam). However, a nonmoving party "may not rest on mere allegations or denials" and
"must do more than show that there is some metaphysical doubt as to the material facts."

Anderson at 256; and Matsushita at 587. Where "the factual context renders respondents' claim
implausible"—for instance,"ifthe claim is one that simply makes no economic sense"—^then

"respondents must come forward with more persuasive evidence to support their claim than
would otherwise be necessary." Matsushita at 587. In sum, an issue offact is genuine if, based

upon the evidence in the record, a reasonable jury could retum a verdict for the norunoving party.
Anderson at 248.

II. Breach of Express Warranty

This court determined in its previous ruling in this matter that South Dakota law governs

substantive issues and the UCC governs the sales contracts between Dakota Style and SunOpta.
Dakota Stvle Foods. Inc. v. SunOpta Grains and Foods. Inc.. 2016 WL 7243534, *2(D.S.D.
2016). Dakota Style requests that this court grant its motion for summaryjudgment as to breach

ofexpress warranty. In order to recover money damages for a breach ofexpress warranty in
South Dakota, Dakota Style must prove the following elements:
(1) an affirmation offact or promise made by the seller to the
buyer relating to the goods;.
(2)such affirmation offact or promise became a part ofthe basis
ofthe bargain;

(3)that the injured party, in making the purchase, relied on the
representations, affirmations of fact or promises;
(4)that the goods sold by the seller failed to comply with the
promises or affirmations offact made by the seller;
(5)that the buyer, because ofsuch failure, was financially injured;
and

(6)that such failure to comply was a proximate cause ofthe
financial injury suffered by the buyer.

Swenson v. Chevron Chemical Co.. 234 N.W.2d 38,42(S.D. 1975)(internal citations omitted).
SDCL § 57A-2-313(l)(b) provides that "[a]ny description ofthe goods which is made part ofthe
basis ofthe bargain creates an express warranty that the goods shall conform to the description."
Further,"[i]t is not necessary to the creation of an express warranty that the seller use formal

words such as 'warrant' or 'guarantee' or that he have a specific intention to make a warranty."
SDCL § 57A-2-313(2). As this court has previously noted,"[pjurchase agreements may

incorporate by reference another document containing technical specifications for the product,
and this will likely create an express warranty by description." James River Eauin. Co. v. Beadle
Ctv. Equip.. Inc.. 646 N.W.2d 265,269(S.D. 2002); Dakota Stvle Foods. Inc. v. SunOpta Grains

and Foods. Inc. at *5. The contracts between Dakota Style and SunOpta specifically state "[a]s

per attached product specifications." The product specification states that "[t]he product shall be
manufactured in accordance with Good Manufacturing Practice 21 CFR,Part #110";"shall
conform in every respect with the provisions ofthe Federal Food, Drug and Cosmetic Act, as
amended,and to all applicable State and Local Regulations"; and "shall meet the Kashruth

requirements ofthe Union of Orthodox Jewish Congregations of America." The product
specifications provide nutritional data, a flavor profile, and indicate that the sunflower kernels
are "[n]utritionally-dense whole food."

SunOpta argues that the product specifications that Dakota Style references do not create
an express warranty for two reasons:(1)that the product specifications were not included in the
contracts with Dakota Style; and (2)that the product specifications disclaim any warranty
through inclusion ofthe following statements:"This information is presented in good faith, and
great care was used in its preparation. However, no warranty, guarantee, or freedom from patent
infringement is implied or intended. This information is offered solely for your consideration and
verification." Dakota Style, as the party having moved for summary judgment for breach of
express warranty, has the burden of proving, by a preponderance of the evidence, that the

product specifications were part of the parties' agreements. Dakota Foundrv. Inc. v. Tromlev
Indus. Holdings. Inc.. 737 F.3d 492,495 (8th Cir. 2013).
A. The Product Specifications Were Included in the Contracts with Dakota Style

It is clear to this court, given the statement in the contracts "[a]s per attached product
specifications," that product specifications were part of the contracts. This is consistent with the
fact that virtually no description of the products Dakota Style purchased are included in the sales
contracts. SunOpta, however, argues that there is a factual issue as to whether the product
specifications were provided to Dakota Style as part of the contract, stating that

Michael Todd,the SiinOpta employee who negotiated the sunflower
contracts with Dakota Style, testified he did not believe he included
the product specifications when he sent contracts to Dakota Style,
and even stated he looked back at emails to see if he had, and no
emails substantiated that product specifications were sent with the
contracts.

Michael Todd also stated via affidavit that "SunOpta does not make its product specifications
generally available to the public." The contracts themselves, two of which were finalized just
over a year before the initiation ofthis dispute, are hand signed and include a provision

requesting that the signed copy be returned to SunOpta. SunOpta is uniquely in possession and
control of these documents; yet, it has failed to submit any evidence that other specifications
were provided to Dakota Style, that Dakota Style was provided or may have otherwise obtained
the specifications exclusive ofthe contract negotiations, or that its files in fact contain no product
specifications and the reference included in the contracts was in error. It is immaterial that

Dakota Style's Vice President, Riley Dandurand, was unable, at deposition, to remember the
exact date that the product specifications were received when he was nonetheless able to specify
that"when we would enter a contract we would get [the product specifications] from SunOpta's
. . . QA or quality control department."
SunOpta must do more than "show there is some metaphysical doubt" as to the

incorporation of product specifications in its contracts with Dakota Style. Matsushita at 587.
Moreover, because this court finds that it is implausible that product specifications would not
have been included in the contracts, that Dakota Style would have had such product

specifications absent their inclusion in the contracts, and that SunOpta would not be able to
dispute the specifications Dakota Style provides, SunOpta must"come forward with more
persuasive evidence to support [its] claim than would otherwise be necessary." Id. No reasonable
jury could return a verdict for SunOpta, based on the evidence that it has provided, that the

product specifications provided by Dakota Style were not included in the contracts. As such, this

matter is not a genuine issue of fact that must be preserved for trial. This court therefore finds
that the product specifications serve as an express warranty pursuant to SDCL § 57A-2313(l)(b).

B. SunOpta's Purported Disclaimer of Express Warranty is Inoperative
SunOpta claims that a statement included on its product specifications disclaims any
warranty that might arise as a result ofthose specifications. SDCL § 57A-2-316(l)states that
Words or conduct relevant to the creation of an express warranty
and words or conduct tending to negate or limit warranty shall be
construed wherever reasonable as consistent with each other; but

subject to the provisions of this chapter on parol or extrinsic
evidence(§ 57A-2-202) negation or limitation is inoperative to the
extent that such construction is unreasonable.

Comment 4 to SDCL § 57A-2-313 clarifies this rule by explaining that
In view of the principle that the whole purpose of the law of
warranty is to determine what it is that the seller has in essence
agreed to sell ...[a] clause generally disclaiming 'all warranties,
express or implied' cannot reduce the seller's obligation with
respect to such description and therefore cannot be given literal
effect under Section 2-316. This is not intended to mean that the

parties, ifthey consciously desire, cannot make their own bargain as
they wish. But in determining what they have agreed upon good
faith is a factor and consideration should be given to the fact that the
probability is small that a real price is intended to be exchanged for
a pseudo-obligation.

While the UCC provides for the possibility of disclaimers of express warranties, then, it also
acknowledges that at once including and disclaiming express warranties may be illogical and that
a seller cannot therefore use a general clause to "reduce [its] obligation with respect to such
description." It is a basic principle of contract law that, where there is a conflict between specific
and general provisions of a written contract, the specific provisions prevail. See, e.g.. Bunkers v.
Jacobsen.653 N.W.2d 732, 738 (S.D. 2002). Further,"[djisclaimers of warranty are to be strictly

construed against the seller." James River Equip. Co.v. Beadle Ctv. Equip.. Inc.. 646 N.W.2d 265,

270(S.D.2002)(internal citations omitted). This court acknowledges the possibility that SunOpta
used its product specifications both to provide information to potential purchasers and as technical

specifications for executed contracts. When these specifications are incorporated by reference into
a given contract, such as those with Dakota Style, rather than serving to inform a potential
customer, the specifications become an express warranty of the contract, as articulated above. It

would be unjust, when those specifications function as an express warranty, to allow SunOpta to
escape its obligation with regard to them. For these reasons, this court finds that there is no

reasonable interpretation ofthe disclaimer such that both the product specifications and disclaimer
remain operative; because the product description is specific, and the disclaimer is general, in
construing the disclaimer against the seller effect must be given to the product description as the
express warranty.

SunOpta does not otherwise dispute that Dakota Style has demonstrated that SunOpta(1)
made an affirmation of fact relating to the sunflower kernels, (2) that such affirmation of fact
became part ofthe basis ofthe bargain, or(3)that Dakota Style, in making the purchase, relied on
such representations offact, as required by the first three elements of a claim for breach ofexpress
warranty. However, SunOpta does dispute that it breached an express warranty for 96.3% of the

product that it sold to Dakota Style, that Dakota Style suffered the financial injury that it claims,
and that SunOpta was the proximate cause of Dakota Style's damages. The court finds that there

are genuine factual disputes with respect to Dakota Style's financial injury, and, as such, that
. summary judgment for breach of express warranty at this juncture should be denied.

C. Dakota Style Need Not Demonstrate Actual Contamination of Recalled Product

SunOpta argues that there is no evidence that 96.3% of the product that it recalled was in

fact contaminated with listeria monocytogenes. Only one lot of sunflower kernel provided to
Dakota Style and ultimately recalled, SunOpta states, tested positive for listeria monocytogenes.
SunOpta argues, relying on a District of Minnesota case applying Minnesota law, that to succeed

on a warranty claim in the event of a food recall, the plaintiff has the burden of showing that the
recalled product was actually contaminated or defective. The case SunOpta relies on. General Mills
Operations. LLC v. Five Star Custom Foods. Ltd.. granted General Mills damages in breach of
contract following a recall of beef Five Star sold to General Mills and which was incorporated as
meatballs into General Mills' canned soups. 789 F.Suppl.2d 1148(D. Minn. May 20, 2011). The
court dismissed General Mills' breach of express and implied warranties claims, holding that

General Mills must show evidence of actual manifestation ofa defect in the products for which it
claimed damages; General Mills only demonstrated, however, that the meat recalled and
incorporated into its products may have been contaminated as a result ofthe recall. Id. at 1154-55.

On appeal, the Eighth Circuit declined to address the breach of warranty argument, holding that
the award of damages to General Mills on breach of contract was proper, and that "[t]his court
makes no statement on the accuracy of the [breach of warranty] ruling," as any argument
challenging that ruling was therefore rendered moot. General Mills Operations. LLC v. Five Star
Custom Foods. Ltd.. 703 F.3d 1104,1112(8th Cir. 2013).

The district court's decision in General Mills relies on Eighth Circuit precedent regarding
the requirement to demonstrate a defect in claims for breach of express or implied warranties:
Cooperative Power Ass'n v. Westinehouse Elec. Corp.. 60 F.3d 1336 (8th Cir. 1995); Briehl v.
General Motors Corp.. 172 F.3d 623(8th Cir. 1999); and O'Neil v. Simplicity. Inc.. 574 F.3d 501

(8th Cir. 2009). None of these cases interpret or apply South Dakota law, the substantive law
governing this case, and this court notes that the requirement to demonstrate breach of express
warranties in South Dakota requires proof"that the goods sold by the seller failed to comply with
the promises or affirmations of fact made by the seller" which may be "inferred from proof that

the product did not perform as intended by the manufacturer." Swenson v. Chevron Chemical Co.
at 503; and Drier v. Perfection, Inc.. 259 N.W.2d 496,504(S.D. 1977); Plaintiffs "are not required
to offer direct evidence of a defect." Schmaltz v. Nissen. 431 N.W.2d 657, 663 (S.D. 1988). This

fact notwithstanding, existing precedent requiring demonstration ofa defect may be distinguished.
Of the cases that the district court in General Mills relies on, O'Neil v. Simplicitv. Inc. is
closest in alignment with the current dispute. O'Neil relies on a reading of Briehl that is analyzed
in greater detail below. In Cooperative Power Ass'n v. Westinghouse Elec. Corp.. the jury found

that there was no defect in an electrical transformer sold by Westinghouse to Cooperative Power
Association where Cooperative Power Association was unable to demonstrate that a transformer
malfunction was related to a defect in its production,rather than installation ofits component parts.
Unlike the dispute at hand. Cooperative Power concerned a single transformer and did not address
product recalls. In Briehl v. General Motors Corp.. SUV owners brought a class action against
General Motors alleging that the new anti-lock braking system General Motors installed on its
SUVs did not perform as the owners expected, even though the system performed as designed.
The court held that the plaintiffs were unable to demonstrate that the brakes were in fact defective,

as indeed they were not, and that the plaintiffs did not adequately plead any damages suffered. No
product recall was at issue in Briehl. nor was it clear that any ofthe plaintiffs had suffered harm.

In contrast, in O'Neil v. Simplicity. Inc.. a group of consumers brought a class action
lawsuit against a manufacturer that had recalled cribs designed with a faulty drop-side opening.

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The cribs caused three infant deaths and other non-fatal injuries and incidents. The manufacturer,

rather than refund the price of the cribs or repair the hardware, offered to mail a repair kit to
customers upon request. Applying Minnesota law,the district court held that the plaintiffs' claims
for breach ofimplied warranty failed because plaintiffs were unable to demonstrate that the defect

for which the cribs were recalled was in fact present in the cribs plaintiffs owned. In dismissing
plaintiffs' appeal, the Eighth Circuit relied on Briehl: "Where, as in this case, a product performs
satisfactorily and never exhibits an alleged defect, no cause of action lies." O'Neil v. Simplicity.
Ina at 504 (internal citation omitted). The court also dismissed plaintiffs' attempt to distinguish

Briehl, stating that the fact that the product at issue in Briehl was not actually defective was
immaterial,since plaintiffs' allegation in Briehl that their vehicles "suffer from defects" was taken

as true. While the Eighth Circuit's clarification of Briehl may have been sufficient to address the
plaintiffs' claims in O'Neil. it is not clear that it captures differences between Briehl and O'Neil
that are material to this case.

The decision in Briehl turns on the fact that plaintiffs were unable to establish that they had
suffered any damages, noting that "[t]he Plaintiffs' ABS brakes have fimctioned satisfactorily and
at no time have the brakes exhibited a defect" and that "[a] reasonable inspection of the driving
characteristics of an ABS-equipped vehicle will reveal the tendencies of ABS braking." Briehl v.
General Motors Corp. at 627, 626. The Eighth Circuit may have just as easily written that
plaintiffs' ABS brakes functioned satisfactorily in spite ofthe tendencies ofABS braking, and that
no harm occurred as a result of those tendencies causing an accident. Indeed, this is in line with
the characterization of Briehl by the Fifth Circuit, also cited by O'Neil. Cole v. General Motors

Corp.. 484 F.3d 717,729(5th Cir. 2007)(stating that "[t]he Eighth Circuit held that the plaintiffs
had no cognizable claims for breach of express and implied warranties—or under any other

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theory—where the braking systems had never malfunctioned or failed"). The Eighth Circuit's
argument in Briehl. then, is that the anti-lock braking system does not constitute a defect because
plaintiffs cannot demonstrate that it resulted in any damages. What the Eighth Circuit decision in

Q'Neil does not address is that the objective increased risk established by the product recall of
cribs known to have caused harm is categorically different than potential damages it previously
characterized as"simply too speculative to allow fBriehn to go forward." Briehl v. General Motors

Corp. at 629. That is, the Eighth Circuit does not acknowledge in O'Neil the unique evidentiary
aspects ofa product recall.

It is possible to distinguish Q'Neil from the current case on other grounds. As noted above,
O'Neil applies Minnesota law, rather than South Dakota law. O'Neil also involved a class action

lawsuit brought by end consumers, rather than distributors. Finally, O'Neil concerned a product
recall of children's furniture, not consumables.

As preliminary observations, product recalls present circumstances and considerations that

are different from those at issue in a products liability action, such as that brought in Cooperative
Power,in which a single product fails with no harm likely to result from that failure. The initiation

of a product recall is regulated by a government agency, whether the US Department of
Agriculture, Food and Drug Administration, National Highway Traffic Safety Administration, or
Consumer Product Safety Commission. Certain aspects of product recalls for food items persuade
this court that food recalls are further unique. Not all consumers purchase cribs or drive an SUV,

but everyone purchases food. Moreover,the financial impact offood product recalls is significant:
the Grocery Manufacturers Association reported in 2011 that 52% ofits members estimated sales
losses and direct recall losses resulting from food recalls at between $10 to $100 million or greater.
Capturing Recall Costs, GMA,Covington & Burling LLP,and Ernst 8c Young,3(2011). The cost

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offood bome illnesses in the US—^which may be linked to products not recalled and other failures

in the supply chain—is estimated at between $55.5 and $93.2 billion annually. Robert ScharfC
State estimates for the annual cost offoodborne illness, 78 J. Food Protection 1064, 1064
(2015). The centrality offood products to the US economy and their regulation by multiple federal
agencies suggests that serious consideration should be given to the treatment of product recalls in
this sector.

Unlike children's products or vehicles, food spoils. Requiring that food be tested to
demonstrate actual contamination necessitates that it be stored in an appropriate environment
during testing, potentially increasing the cost of a recall. Testing a product to demonstrate that it

is contaminated may require testing a significant amount ofproduct, as pathogens may not spread
evenly throughout a product,requiring a large sampling program.See, e.g., Beth Kovdtt, Why Our
Food Keeps Making Us Sick,Fortune(May 6,2016)(^wo/z/ig Associate Professor ofFood Safety
at North Carolina State University, Ben Chapman: "[i]f you take a whole bunch of lettuce heads
off a truck and test one out of 100, you still might not find a problem because it's not likely to be
spread evenly"). The Eighth Circuit could not have intended this outcome. To create a rule that

would require a plaintiff in a food product recall case to incur disproportionate costs in order to
demonstrate an actual defect is contrary to public policy. If actual manifestation of contamination
were required to prove a defect, courts may incentivize entities in the food chain distribution to
delay the process of recall to focus on whether reimbursement for recalled product will be
forthcoming. As such, the recall itself, conducted pursuant to regulatory guidelines, should serve

as sufficient evidence of defect required to demonstrate a breach ofexpress or implied warranty.
Not all jurisdictions require the demonstration of a defect for a successful breach of
express or implied warranty claim. See, e.g., In re Bridgestone/Firestone. Inc.. 155 F.Supp.2d

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1069,1099-1101 (S.D.Ind. 2001){rev'don other groundslU F.3d 1012(7th Cir.2002));jee

Cole V. General Motors Corp. at 729 (stating, in the context ofrecovery under a vehicle warranty,
that "it is not clear that the actual manifestation of a vehicle defect is a common prerequisite for
recovery under warranty law in all jurisdictions"). To recover for breach of warranty in South

Dakota,"[n]o specific defect need be shown if the evidence, direct or circumstantial, permits the
inference that the problem was caused by a defect." Drier v. Perfection. Inc. at 504. In light of
South Dakota law, and following a line ofcases decided in the Sixth Circuit, this court holds that,
where food product recalls are at issue, the recall notice serves as evidence of an increased risk of

injury, and that such increased risk constitutes a defect, regardless of whether the risk manifests
itself. See In re Whirlpool Corp. Front-Loading Washer Products Liability Litigation. 722 F.3d

838 (6th Cir. 2013); and Storey v. Attends Healthcare Products Inc.. 2016 WL 3125210 (E.D.
Mich. 2016).

Given that Dakota Style is not required to provide direct evidence of a defect in a breach
of express warranty claim and that, moreover, the recall itself would serve as evidence of such a

defect, Dakota Style must still demonstrate that"the goods sold by the seller failed to comply with
the promises or affirmations of fact made by the seller." This court is persuaded that product that
is recalled due to potential contamination with listeria monocytogenes does not meet the
requirements outlined in the product specifications that "[t]he product shall be manufactured in
accordance with Good Manufacturing Practice 21 CFR, Part #110"; "shall conform in every
respect with the provisions of the Federal Food, Drug and Cosmetic Act, as amended, and to all
applicable State and Local Regulations"; "shall meet the Kashruth requirements of the Union of
Orthodox Jewish Congregations of America"; or that the product is a "[njutritionally-dense whole

food." As Dakota Style has articulated, 21 CFR § 110 requires process controls that prevent food

14

contamination. 21 CFR§ 110.40, § 110.80. That SunOpta was not cited for such violations by the

FDA is not dispositive ofthe fact that the goods sold failed to comply with the seller's affirmations.
SunOpta itself states that product contaminated with listeria monocytogenes is "adulterated" in

violation of the Federal Food, Drug and Cosmetic Act. 21 U.S.C. § 342(a)(1). SunOpta's claim
that it did not breach an express warranty for 96.3% of the product supplied to Dakota Style thus
fails to the extent that such product was in fact recalled by SunOpta,regardless of whether Dakota
Style tested such product for contamination. That is, the goods sold by SimOpta to Dakota Style
and then recalled failed to comply with the affirmations of fact made by SunOpta and
memorialized in the product specifications, satisfying element(4)ofa claim for breach ofexpress
warranty. Swenson v. Chevron Chemical Co. at 503.

D. Questions of Fact as to the Extent of Dakota Style's Financial Injury Remain
SunOpta also disputes that Dakota Style suffered the financial injury that it claims.

SunOpta alleges that the majority of product for which Dakota Style claims damages was
ultimately purchased by end consumers and that Dakota Style received payment for such products.
Dakota Style, however, states that although it did receive initial payments from its customers of
$1,495,681 for a portion of the recalled product it sold, its customers required Dakota Style to
refund that purchase price, in addition to charging Dakota Style additional expenses related to the
recall. Dakota Style further maintains that it paid SunOpta $1,755,600 for sunflower kernel
product, a sum that SunOpta disputes as reflecting Dakota Style's mark-up to consumers and
product that was not recalled. There is a contested question of fact, then, as to whether Dakota

Style was financially injured and to what extent as a result of SunOpta's failure to comply with
the product's express warranties. For this reason, summary judgment as to breach of express
warranty should be denied.

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E. Questions of Fact as to the Cause of Dakota Style's Financial Injury Remain
SunOpta also disputes that it was the proximate cause of Dakota Style's damages. Dakota

Style alleges that its contracts with consumers penalize Dakota Style for a product recall by
charging a fee in the event ofrecall and by requiring that Dakota Style products beyond the recall
be removed from store shelves. The scope ofthe damages Dakota Style suffered as a result ofsuch
contract provisions with its consumers is unclear from its briefs. As such, there is an issue of

material fact as to whether SunOpta's failure to comply with its express warranties was a proximate
cause of all the financial injury that Dakota Style claims it suffered.

III. Breach of Implied Warranty of Fitness for a Particular Purpose
Dakota Style also requests summaryjudgment as to its claim ofbreach ofimplied warranty
offitness for a particular purpose. SDCL § 57A-2-315 states that
Where the seller at the time of contracting has reason to know any
particular purpose for which the goods are required and that the
buyer is relying on the seller's skill or judgment to select or furnish
suitable goods,there is unless excluded or modified under § 57A-2316 an implied warranty that the goods shall be fit for such purpose.
Implied warranties are obligations created by law and "enforced under the form of a contract"

Virchow v. Univ. Homes. Inc.. 699 N.W.2d 499, 505 (S.D. 2005). As an obligation arising under
contract,"[pjroofofthe breach of an implied warranty is sufficient to justify recovery irrespective
of fault or negligence of the seller." Waggoner v. Midwestern Development Inc.. 154 N.W.2d

803, 807(S.D. 1967). The following must be in evidence for an implied warranty of fitness for a
particular purpose to be found:

1. The seller must have reason to know the buyer's particular
purpose.

2. The seller must have reason to know that the buyer is relying on
the seller's skill or judgment to furnish appropriate goods.
3. The buyer must,in fact, rely upon the seller's skill or judgment.

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Diamond Surface. Inc. v. State Cement Plant Com'n> 583 N.W.2d 155, 162(S.D. 1998). A seller

"must deliver a product that is fit for the purpose for which it is intended" where an implied
warranty of fitness for a particular purpose is created. Virchow v. Univ. Homes. Inc. at 505. A
party asserting a violation of the warranty of fitness for a particular purpose "must present
sufficient evidence, direct or circumstantial, to permit the inference that the product was defective
when it left the manufacturer's possession or control." Id. at 506.

Dakota Style claims that SunOpta breached the implied warranty offitness for a particular
purpose by distributing product containing listeria monocytogenes when SunOpta knew that the
product would be distributed and sold for human consumption. Dakota Style states that SimOpta
provided Dakota Style with market research showing Dakota Style's relative ranking in the
sunflower seed market and forwarded to Dakota Style a photograph ofSunOpta employees in front
ofits product. The two companies also discussed Dakota Style's sales to Walmart. SunOpta claims
that it was not on notice that Dakota Style intended to use its product for human consumption,that
evidence of actual adulteration is necessary to prove that it breached this warranty, and that there
is a question of fact as to whether Dakota Style relied on SunOpta's judgment in furnishing the
appropriate goods. As with breach ofexpress warranty, this court holds that the recall notice itself
serves as evidence of adulteration ofthe product.
SunOpta's only evidence that it did not know that Dakota Style, registered as Dakota Style
Foods, Inc., used its product for food is the testimony of Michael Todd that "I don't know what

our customers are doing with the product" and testimony ofLisa Robinson, Vice President ofFood

Safety and Quality Assurance, that she does not know of any use of sunflower kernels produced
by SunOpta outside ofthe human food chain. Presumably,Dakota Style could use sunflower seeds

for bird seed or other animal food products. However, in his affidavit in opposition to Dakota

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Style's motion for summary judgment, Michael Todd referred to the product SunOpta supplied
Dakota Style as "nut snacks." During deposition, Michael Todd notes that the sunflower kernels

may be flavored dill, ranch, barbecue, salt and pepper, or honey, agreeing that the product is

seasoned depending on what Dakota Style has ordered. According to a deposition that SunOpta
presents on its behalf, Riley Dandurand stated that Dakota Style's relationship with SunOpta,then
known as Dahlgren's, existed as early as the mid-1990s, and that SunOpta packaged sunflower
seeds for Dakota Style until Dakota Style began doing so itselfin 2012. The product specifications
included with the contracts indicate that the sunflower kernels are a "[njutritionally dense food"
and identify the sunflower seeds as "savory bacon," "BBQ," "dill pickle," "honey roasted,"
"ranch," and "salt and pepper." It is clear to this court, then, that SimOpta knew that Dakota Style
used its sunflower kernels for human consumption. There is no reason bird seed would be flavored

barbecue. The factual context, in this instance, renders SunOpta's claim totally implausible, and
SunOpta has failed to do more than rest on its allegation that there is some metaphysical doubt as
to whether it knew that the sunflower kernels were used for human consumption.
Moreover, because SunOpta provided product specifications for the sunflower seeds in its

contracts with Dakota Style and flavored its products depending on Dakota Style's request, it is
apparent to this court that SunOpta knew that Dakota Style relied on it to produce sunflower
kernels fit for human consumption, and that Dakota Style would so rely. While the elements of
breach of implied warranty of fitness for a particular purpose are then met, Dakota Style should
nonetheless not be granted summaryjudgment on this issue. The same factual questions regarding
financial injury as adhere to the breach ofexpress warranty claim apply here. As the breach of an
implied warranty sounds in contract, any action for such breach requires proof of damages. See,
e.g., Waggoner v. Midwestern Development. Inc. at 807; Morris. Inc. v. State, ex rel. State Dent.

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of Transp., 806 N.W.2d 894, 903 (S.D. 2011). Since there remains a dispute as to the extent of
damages suffered by Dakota Style, summary judgment should not be granted for breach of an
implied warranty offitness for a particular purpose.
IV. Breach of Implied Warranty of Merchantability

Dakota Style requests that this court enter summary judgment as to its claim of breach of
implied warranty of merchantability. SDCL § 57A-2-314 states that, unless excluded or modified,

"a warranty that the goods shall be merchantable is implied in a contract for their sale ifthe seller
is a merchant with respect to goods of that kind." Merchantable goods must be those that, at a
minimum,

(a)Pass without objection in the trade under the contract description;
and

(b)In the case of fungible goods, are of fair average quality within
the description; and
(c) Are fit for the ordinary purposes for which such goods are used;
and

(d) Run, within the variations permitted by the agreement, of even
kind, quality and quantity within each unit and among all units
involved

SDCL § 57A-2-314. Dakota Style argues that SunOpta's product was not merchantable because it

did not pass without objection in the trade under the contract description, was not of fair average
quality within the description, was not fit for the ordinary purpose for which such goods are used,
and did not run within the variations ofthe parties' contracts. SunOpta argues that, because Dakota
Style has not provided evidence that the product was defective, this claim should fail. SunOpta
also argues that the recalled product was merchantable at the time it was sold and that Dakota Style
had already sold to its customers product covered by the recall.

As support for its argument, SunOpta cites a District of South Dakota case applying South
Dakota law, Lindholm v. BMW ofN. Am.. LLC. 202 R Supp. 3d 1082(D.S.D. 2016), affd, 862

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F.3d 648 (8th Cir. 2017). This court disagrees with SunOpta's comparison of Lindholm to the

current case. In Lindholm. the District Court dismissed the-plaintiffs implied warranty claims
where the plaintiffs misuse ofa carjack resulted in his death. Misuse or abnormal use ofa product
is a common defense to the applicability of the implied warranties. See, e.g., Diamond Surface at
163; Roderick J. Mortimer, Cause ofActionfor Economic Loss Resultingfrom Breach ofImplied
Warranty ofMerchantability Under UCC§2-314, 11 Causes OF Action 531 § 12(May 2018).

The Eighth Circuit affirmed, stating that plaintiffs contributory negligence "was quite clearly the
primary cause of the accident." Lindholm v. BMW of N. Am.. LLC. 862 F.3d 648,653 (8th Cir.
2017). Dakota Style's contributory negligence for contaminating the sunflower kernels is not
alleged here. As above, the evidence of the recall itself and increased risk of contamination

demonstrate that the product SunOpta provided to Dakota Style was defective.
Comment 1 to SDCL § 57A-2-314 makes clear that the seller's obligation "applies to

present sales." SunOpta claims that, because Dakota Style sold the recalled product to its
customers prior to the recall, the product was merchantable at the time of sale. This is a novel
argument. However,the recall itself refutes SunOpta's argument, as the contamination for which

the sunflower kernels were recalled was extant when those kernels left SunOpta's control, at the
time ofsale to Dakota Style. Nonetheless, summary judgment of the implied warranty of
merchantability at this juncture should not be granted, since there remains a dispute as to the
extent of damages suffered by Dakota Style.
V. Breach of Contract

Dakota Style requests summary judgment on its claim for breach of contract, stating that
SunOpta "breached its promise to supply Dakota Style with sunflower kernels that were

manufactured in accordance with Good Manufacturing Practice 21 CFR,Part #110 and

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conformed in every respect with the provisions ofthe Federal Food, Drug and Cosmetic Act" as

required by the product specifications. Dakota Style's breach of contract claim includes breach
for the failure of SunOpta to supply all product agreed to in the parties' requirements contract

after product was recalled. SunOpta states that Dakota Style is not entitled to summary judgment
on its breach of contract claim because(1)SunOpta breached no promise, as it disputes that the
product specifications were incorporated into the contract;(2)Dakota Style suffered no damages;
and (3)Dakota Style has not provided evidence of defect for the majority of product for which it
requests damages. This court has already addressed issues(1) and (3). In order to sustain a claim
for breach of contract, a party must provide "proof of an enforceable promise, its breach, and
damages." Morris. Inc. v. State, ex rel. State Dent, of Transp. at 903 {quoting McKie v. Hutlev.
620 N.W.2d 599,603 (S.D. 2000)). However, where one party is injured from another's breach
of contract, the injured party has a duty to mitigate avoidable damages.See, e.g., Ducheneaux v.
Miller. 488 N.W.2d 902,917(S.D. 1992). This court agrees that there is a dispute as to the
extent of damages Dakota Style sustained and whether Dakota Style made reasonable efforts to
mitigate its damages; as such, summary judgment on this issue should not be granted.
VI. Dakota Style's Request for Consequential Damages

SimOpta requests this court grant it summary judgment on Dakota Style's claims for
consequential damages and other damages beyond the purchase price of the recalled product.
SunOpta notes that the parties' contracts include a limitation ofliability clause limiting damages
to the purchase price ofthe product. Dakota Style argues that the limitation ofliability clause is
unconscionable. The parties do not dispute that the following provision is included-in their
contracts:"The SUNOPTA GRAINS AND FOOD GROUP liability, whether contractual or

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otherwise, is exclusively limited to the purchase price ofthe product under all circumstances and
regardless ofthe nattire, cause or extent ofthe loss."

Under South Dakota law,"[cjonsequential damages may be limited or excluded unless
the limitation or exclusion is unconscionable." § SDCL 57A-2-719. The issue of

unconscionability is a matter oflaw to be determined by the trial court. § SDCL 57A-2-302(l);
Johnson v. John Deere. 306 N.W.2d 231,236(S.D. 1981). Each party must be given the
opportunity to present evidence "as to [the contract's] commercial setting, purpose and effect to

aid the Court in making the determination." § SDCL 57A-2-302(2). A court is not required to
hold a formal hearing where "all possible evidence is already in the record." Golden Reward
Min. Co. V. Jervis B. Webb Co.. 722 F.Supp. 1118,1121 (D.S.D. 1991)(guotins Herrick v.
Monsanto Co.. 874 F.2d 594, 597(8th Cir.1989)). Unconscionability is "a determination to be
made in light of a variety offactors not unifiable into a formula." Johnson v. John Deere at 236.

"One-sided agreements whereby one party is left without a remedy for another party's breach are
oppressive and should be declared unconscionable." Durham v. Ciba-Oeiev Corp.. 315 N.W.2d
696, 700(S.D. 1982)(internal citations omitted); see also Braun v. E.I. du Font De Nemours and

Co., 2006 WL 290552(D.S.D. 2006)(discussing the unconscionability provisions in the UCC
and holding that Durham remains good law in South Dakota). When determining whether a
contract is unconscionable, courts focus on "both overly harsh or one-sided terms, i.e.,
substantive unconscionability[,] and how the contract was made(which includes whether there
was a meaningful choice), i.e., procedural unconscionability." Nvaaard v. Sioux Vallev

Hospitals & Health Svstem. 731 N.W.2d 184, 195(SiD. 2007)(internal citations omitted).

A limitation ofliability clause in a contract between sophisticated business entities, as in
the current dispute, may be procedurally unconscionable where a seller uses its superior

22

bargaining power to limit negotiation and unfair surprise is at play. Golden Reward Min. Co. v.
Jervis B. Webb Co. at n.l6 (citins Contruction Assoc. Inc. v. Fareo Water Equip. Co..446
N.W.2d 237(N.D. 1989)(applying North Dakota law)). Dakota Style concedes that it could have

sourced its sunflower kernels from another company at the time it contracted with SunOpta, and
therefore had a meaningful choice as to suppliers. Determining that a contract provision between
business entities is substantively unconscionable is extremely rare. Where,as here, SunOpta has
the power to recall product repeatedly—approximately one year of Dakota Style's inventory in
the instant case—SunOpta effectively has the latitude to render the distributors with which it

does business unprofitable. It strikes this court that such a limitation ofliability clause in a
contract may be substantively unconscionable in the case of product recalls. The extent to which
recall liability insurance is available to cover the costs incurred by Dakota Style is also unclear,

in spite of SunOpta's argument to the contrary.^ The court has not heard all evidence as to the
commercial setting, purpose and effect ofthe contracts at issue. As such, SunOpta's request for
summary judgment on consequential damages should be denied.

^ The 2012 Farm Bill included a provision directing the USDA to study the feasibility ofa crop insurance product
that covers a producer's losses after a food safety recall occurs for specialty products. Study ofFood Safety
Insurance, Agriculture Reform, Food,and Jobs Act of2012,7 U.S.C. 1522(c)(22), The report was commissioned in
light ofthe fact that, when recalls happen,"consumers stop piu-chasing the product regardless of what farm the food
came fi-om" and "producers suffer major financial losses because ofa recall that they did not cause." S.Amdt.2309
to S.3240, Agriculture Reform,Food,and Jobs Act of2012 (statement of Sen. Dianne Feinstein). The report itself,
which focused on recall crop insurance, noted that one stakeholder "indicated that producer interest was higher for
recall liability insurance (i.e. responsibility for damages incurred by other parties) than for recall crop (yield or
revenue) insurance." Research Report for the Study ofFood Safety, W&A Crop Insurance Division, Contract No.
GS10F0I55P, Order No.D14PD01117 1 (Jan. 30,2015). Stating that recall liability insurance was outside ofthe
scope ofthe study, the report did not cover this topic in any greater detail. Recall coverage itself"is a relatively new
and evolving insur^ce product" that historically has been held by "a relatively small minority offood companies."
Jonathan M.Cohen, Managing the Financial Risks ofChanges in the Regulation ofFood Manufacturing and
Distribution, ASPATORE *5(Nov. 2012). Smaller food companies may be at a disadvantage in managing the
financial risks ofproduct recalls. For instance, smaller food companies may be required to provide indemnification
to larger companies with which they contract "because larger companies often refiise to do business absent such
indemnification" but find that these indemnities "are often far broader than the insurance a company might have."
Id. at *2-*3. There are questions offact, then, as to whether Dakota Style could have insured against the losses it
sustained as a result of SunOpta's recall.
23

Dakota Style also claims that it should not be limited to recover the purchase price ofthe
recalled product because, in directing Dakota Style to its insurance claims process, SunOpta
modified the contract as "[tjhere is no evidence that [insurance] coverage was limited to the

refund ofthe purchase price." Dakota Style further argues that it is a third-party beneficiary to
SunOpta's insurance contract. Dakota Style is not listed as an additional insured of SunOpta's

insurance on copies ofthe insurance policies filed by Dakota Style. Nor has Dakota Style
indicated that it was the intent of SunOpta and its insurer to enter into the insurance contract to

benefit Dakota Style, as is required imder South Dakota law. Jennings v. Rapid Citv Regional
Hosp., Inc., 802 N.W.2d 918,921 (S.D. 2011)(internal citations omitted). Intent is first
determined by "look[ing] at the language ofthe contract." Id. "The terms of the contract must

clearly express intent to benefit that party or an identifiable class of which the party is a
member."Id. at 922. Dakota Style has made no argument at this point that intent to benefit it or
SiuiOpta's distributors is indicated in the insurance contracts. This court further finds no merit in

the argument that purchase of insurance modifies a separate contract between two parties.
Dakota Style essentially argues that SunOpta unilaterally modified the parties' contracts;

however,"modification ofa contract cannot be effected by the sole action of one of the parties to
it." Ahlers Bldg. Supplv. Inc. v. Larsen. 535 N.W.2d 431,435 (S.D. 1995). Dakota Style
provides no evidence that the parties mutually agreed to SunOpta's purchase of insurance.
VII. Dakota Style's Request for the Purchase Price of Kernel Product Not Recalled

Dakota Style argues that it should receive reimbursement for products not recalled that
were nonetheless removed from its customers' shelves as a result of SunOpta's recall. These

damages may be characterized as consequential damages. Consequential damages are those that
"do not flow directly and immediately from an injurious act but that result indirectly from the

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act." Damages,SLACK'S Law Dictionary (10th Ed. 2014). As this court declines to grant
SunOpta's request for summary judgment as to consequential damages,the court should also

refrain from granting SunOpta's request for summaryjudgment for the purchase price ofkernel
product not recalled.
VIII. Dakota Style's Request for the Purchase Price of Kernel Product Recalled

As outlined in Part II, Sections D and E above, SunOpta claims that Dakota Style's request
for the purchase price of kernel recalled reflects Dakota Style's mark-up to consumers and that
Dakota Style has already received payment for the recalled product from its customers. Dakota

Style disputes this claim, stating that its customers required that it refund their purchase prices for
the product. As there are contested questions of fact regarding the extent to which Dakota Style
was financially injured following SunOpta's recall, summary judgment on this issue is not
appropriate. However, this court notes that the inapplicability of the collateral source rule to this
claim is not as clear as SunOpta alleges. See, e.g., Joseph M. Perillo, The Collateral Source Rule
in Contract Cases,46 San Diego L. Rev.705 (August/September 2009).
IX. Dakota Style's Unpaid Balance
SunOpta requests the court enter summary judgment for Dakota Style's outstanding

balance of $641,083.92 of product received, to include a late charge of 1.5% per month for
payments not made within 45 days. Dakota Style also requests that this court enter summary
judgment on SunOpta's claims of breach of sales contract and conversion in connection with

Dakota Style's unpaid balance. Dakota Style acknowledges that it indeed has an outstanding
balance of$641,083.92 with SunOpta, but invokes the right to set-off of damages to avoid paying
this sum. Under SDCL 57A-2-717, a buyer "on notifying the seller of his intention to do so may

deduct all or any part of the damages resulting from any breach of the contract from any part of

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the price still due under the same contract." Comment 2 further provides that "no formality of

notice is required and any language which reasonably indicates the buyer's reason for holding up
his payment is sufficient." However, the breach involved "must be of the same contract under

which the price in question is claimed to have been earned." SDCL 57A-2-717 cmt. 1. SunOpta
disputes that Dakota Style provided it with notice that it intended to set-off its damages. SunOpta
also claims that set-offis inappropriate as it owes Dakota Style no damages. Whether Dakota Style
provided SunOpta with notice that it intended to set-offits damages and whether Dakota Style has
damages with which to set-off the amount it owes SunOpta are open questions of fact.
Additionally, whether the damages Dakota Style sustained were under the same contract as its
unpaid balance is also a question offact. Summary judgment on this issue at this time is therefore

inappropriate. SunOpta's complaint also requests set-offfor any damages it owes Dakota Style of
Dakota Style's outstanding balance. The same questions offact apply to SunOpta's request.
X.SunOpta's Breach of Contract, Unjust Enrichment,Promissory Estoppel, and Fraud
Claims in Connection with its $253,889.00 Payment to Dakota Style

Dakota Style requests that this court enter summary judgment on SunOpta's claims in
connection with its $253,889.00 payment to Dakota Style. SunOpta states, pursuant to an invoice
received from Dakota Style, that it issued payment to Dakota Style for $253,889.00 via wire

transfer to cover the cost of recalled sunflower products. SunOpta claims that it issued such
payment based on an agreement with Dakota Style that Dakota Style would provide

documentation substantiating that the payment was for actual recalled product and showing that
the recalled product was destroyed or returned to SunOpta. SunOpta further states that Dakota

Style has failed to provide such documentation. There are material questions of fact regarding
the representations made during the agreement to remit this payment to Dakota Style and the

26

ternis ofthe payment, to include whether Dakota Style agreed to provide documentation to
SunOpta as SunOpta alleges, whether there were conditions on the rehmd,and whether the

parties formed an oral contract with regard to the payment. Viewing these claims in the light
most favorable to SunOpta,this court declines to grant Dakota Style summaryjudgment on any
of SimOpta's claims in connection with the $253,889.00 payment.
XI. Conclusion

In sum,this court declines to grant either Dakota Style's or SunOpta's requests for
summary judgment.
ORDER

Now,therefore,
IT IS ORDERED:

1. Plaintiffs motion for partial summary judgment, Doc. 28,is denied.
2. Defendant's motion for summary judgment. Doc. 34,is denied.
3. The requests for oral argument are denied.

Dated this/

of July, 2018.
BY THE COURT:

CHARLES B. KORNMANN

United States District Judge

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