A unanimous California Supreme Court ruling held companies can’t defeat lawsuits alleging tortious interference claims through use of contractual provisions limiting the amount of money damages for which they can be sued.
The underlying federal litigation is a dispute between New England Country Food and Vanlaw Food Products regarding barbecue sauce and a client relationship with Trader Joe’s.
The U.S. Ninth Circuit Court of Appeals asked the state’s top court to analyze the validity of contract language under California Civil Code. Justice Goodwin Liu wrote the unanimous opinion, filed April 24.
According to court records, Vermont-based NECF started selling its sauce to Trader Joe’s in 1999. The grocer labeled it “TJ’s Bold & Smoky Kansas City Style Barbecue Sauce.” In 2015, NECF outsourced production of the sauce to VanLaw.
In its lawsuit, NECF alleged that as the end of the initial three-year contract neared, VanLaw violated a provision barring it from reverse engineering the sauce and said VanLaw illegally tried to sell directly to Trader Joe’s.
“VanLaw’s president laid the groundwork in emails to Trader Joe’s, which NECF later discovered in separate litigation regarding sriracha sauce,” Liu wrote. “NECF and VanLaw failed to agree on terms for renewal. NECF asserts that because of VanLaw’s promise to clone the barbeque sauce, Trader Joe’s ended its decades-long relationship with NECF. VanLaw was ultimately unable to replicate the barbecue sauce, and Trader Joe’s stopped selling it altogether.”
A federal judge dismissed the case, in which NECF sought $6 million in lost profits, legal fees and punishment, because a manufacturing contract between the two companies limited awards to court orders and direct damages. After oral arguments on appeal, the U.S. Ninth Circuit sent the case to the California Supreme Court to answer a question: “Is a contractual clause that substantially limits damages for an intentional wrong but does not entirely exempt a party from liability for all possible damages valid under California Civil Code Section 1668?”
Liu said the dispute calls for analysis of the code’s ban on liability releases for willful injury and said doing so forces a distinction between NECF’s breach of contract allegation and other claims outside of the contract.
The court first rejected VanLaw’s argument the code was inapplicable to contracts between two private commercial entities, noting “the rule that parties may not contract away liability for willful injury is well established and widely recognized.” Turning to the question of damages should a party prove liability, Liu said “the Legislature did not intend to allow parties to privately negotiate how much they are willing to pay to inflict willful injury.”
Clauses that limit damages, the court held, “aim to have the same effect” as shielding a party from responsibility, and “the surrounding language serves to broaden” the relevant code section. Liu drew a comparison to the law not allowing an insurance company to provide coverage for “willful torts” and said courts elsewhere have endorsed the idea that public policy runs counter to liability limits for intentional conduct “without distinguishing between limits and full releases.”
Although the Ninth Circuit invoked two cases where damage limits might be valid under Section 1668, Liu said the Supreme Court found each “largely distinguishable.” However, Liu did say the section doesn’t preclude liability limits on contractual breaches “absent a violation of an independent duty that falls within the ambit” of the code and explained the distinctions between two-party contract law and the social policy implications of tort law.
“Many of VanLaw’s arguments for upholding the limitation provisions here are rooted in its position that NECF asserts nothing more than a contractual breach of the reverse-engineering provision ‘couched’ as a tort,” Liu wrote. “But whether NECF has adequately alleged torts independent of a breach of contract is not before us, and we express no view.”
The resulting conclusion, Liu wrote, is only that if NECF adequately alleged VanLaw willfully committed tortious conduct outside of any contractual breaches, dismissal under Section 1668 would be improper.
NECF was represented before the court by attorney Michael K. Hagemann, of M.K. Hagemann P.C., of Century City.
VanLaw was represented by attorney Krista L. DiMercurio, of Magarian & DiMercurio, of Irvine.
California Supreme Court ruled the maker of a popular store-brand barbecue sauce formerly sold by supermarket chain Trader Joe's may be able to sue another company they had hired to produce their sauce, but instead are accused of allegedly attempting to reverse engineer the sauce and undercut their relationship with Trader Joe's