WTI, Inc. v. Jarchem Industries, Inc.

Citations: 11 F. Supp. 3d 1274; 2014 WL 1292691; 2014 U.S. Dist. LEXIS 42732Docket: Civil Action No. 2:10-CV-0238-RWS

Court: District Court, N.D. Georgia; March 31, 2014; Federal District Court

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Jarchem's Motion for Partial Summary Judgment and Motion in Limine to Exclude Evidence Related to Destroyed IONAL LC are under consideration by the Court. WTI develops and sells functional ingredients for the meat and poultry industry, specifically its IONAL products, while Jarchem manufactures and sells chemicals, including sodium diacetate. In February 2009, WTI placed three orders for sodium diacetate from Jarchem, providing a purchasing specifications sheet. WTI also received Jarchem’s product specification sheet indicating that the sodium diacetate is 'GRAS' (generally recognized as safe by the FDA) under good manufacturing practices (GMP).

WTI tests all incoming products for compliance with its specifications, which included chemical testing from the 2008-2009 Food Chemical Codex (FCC). The FCC provides guidelines for good manufacturing practices and emphasizes the need for food safety assurance systems like Hazard Analysis and Critical Control Points (HACCP). Jennifer Rench, WTI’s Quality Assurance Manager, noted that compliance with the FCC entails more than just chemical testing; it also requires adherence to GMPs and sanitation regulations.

Before accepting the sodium diacetate, WTI conducted tests on a sample to ensure it met their specifications and did not adversely affect the IONAL product's color. Upon passing these tests, WTI accepted the shipment, which included a continuing product guaranty from Jarchem affirming that the sodium diacetate was not adulterated or misbranded at the time of shipment, in compliance with the Federal Food, Drug, and Cosmetic Act. WTI also received a Certificate of Analysis (COA) confirming the product's name and additional documentation, including a Nutrition Statement, Allergen Statement, and a Kosher Certificate, in line with standard industry practices.

Jarchem asserts that its sodium diacetate met FCC and WTI specifications upon shipment. The sodium diacetate was part of the IONAL product, which conformed to WTI specifications before being distributed. However, on July 20, 2009, Tyson Foods reported an issue with the IONAL product, stating it produced an "uncharacteristic substance" in chicken applications, resulting in the return and destruction of affected products. WTI issued a credit to Tyson, leading to the current lawsuit. Subsequently, WTI altered its purchasing specifications for sodium diacetate to ensure it produced no physical matter when dissolved in water at a 25% concentration. The lawsuit was initiated in November 2010, with an Amended Complaint filed by WTI on July 30, 2012, adding claims for breach of contract, fraud, and punitive damages. Jarchem is seeking partial summary judgment on the fraud and punitive damages claims. 

The legal standard for summary judgment under Federal Rule of Civil Procedure 56 requires the moving party to demonstrate the absence of a genuine dispute over material facts. If satisfied, the burden shifts to the non-moving party to present evidence of a genuine issue. The court must view evidence in favor of the non-moving party and may grant summary judgment if the evidence is not significantly probative or merely colorable. WTI's fraud claim alleges that Jarchem misrepresented its sodium diacetate's compliance with the FDCA and FCC, specifically through Jarchem’s Guaranty and product labeling, asserting that WTI relied on these misrepresentations to its detriment. Under Georgia law, fraud requires a false representation, intent to induce reliance, justifiable reliance, and resulting damages. Jarchem must show a lack of evidence for any of these elements to succeed in its motion for summary judgment.

Jarchem asserts that WTI has not provided sufficient evidence to establish scienter, which is essential for a fraud claim. The Court concurs, noting that WTI has not demonstrated any element of fraud, particularly regarding Jarchem's knowledge of any falsity in its representations at the time of sale. Jarchem claims WTI lacks evidence that it knew the sodium diacetate was non-compliant with FDA or FDCA standards, was adulterated, or was misbranded. WTI does not counter this assertion effectively and instead focuses on a theory of reckless misrepresentation, which is recognized in Georgia law as a basis for fraud. 

WTI argues that Jarchem's Guaranty and Certificate of Analysis (COA) imply compliance with FDCA and FCC regulations, claiming these representations were made recklessly due to Jarchem's lack of various food safety protocols in 2009. However, the Court finds that WTI's allegations about non-compliance with the FDCA lack specificity and that WTI has not provided evidence showing that sodium diacetate could be considered non-compliant with the FDCA. Furthermore, WTI's argument regarding labeling is deemed insufficient, as it relies on unsubstantiated assumptions about the product's labeling and compliance. 

While WTI cites guidelines from the FCC to support its claims, the Court notes that these are not mandatory regulations. A critical issue remains regarding whether Jarchem's product was adulterated, which is pivotal to the case. The Court emphasizes that the determination of fraud hinges on the seller's knowledge at the time of sale, not on current knowledge.

The Court previously determined that the sodium diacetate defect was not easily detectable and could only be identified through laboratory testing after the product was used at a 25% concentration. Jarchem claims, which WTI does not contest, indicate uncertainty regarding the presence of an adulterant in the product. WTI failed to provide evidence that Jarchem intentionally misrepresented its compliance with the Federal Food, Drug, and Cosmetic Act (FDCA) regarding adulteration and labeling.

The Court questions whether the product's designation as 'Sodium Diacetate FCC' implies full compliance with the FCC. Assuming it does, it is uncontested that Jarchem’s product met both WTI’s and FCC’s chemical testing standards prior to acceptance. WTI alleges that Jarchem misrepresented its compliance with additional FCC requirements, citing depositions from Dennis Lamb and Edward Carway, which reveal that Jarchem lacked several good manufacturing practices (GMPs) and safety programs in 2009. However, the Court agrees with Jarchem that these testimonies do not demonstrate fraudulent misrepresentation, as FCC GMP guidelines are not mandatory requirements but rather best practices. Jarchem provided evidence showing it adhered to many principles of GMPs, raising doubt about any misrepresentation.

Consequently, the Court finds no evidence of scienter or intent to deceive by Jarchem, granting its Motion for Partial Summary Judgment on WTI’s fraud and punitive damages claims. Additionally, on July 20, 2009, Tyson reported an issue with the IONAL product, leading WTI to reject Jarchem's sodium diacetate and issue a destroy order for contaminated chicken products. This dispute was later submitted to Jarchem’s insurance carrier.

In January 2010, WTI destroyed approximately 40,000 pounds of returned IONAL, with a single bag later found and tested by the Parties. Jarchem claims WTI's destruction constitutes spoliation and seeks sanctions or exclusion of evidence relating to the destroyed IONAL and associated damages. WTI's total damage claim is $256,885.22, which includes various costs related to the returned IONAL and payments to Tyson for losses attributed to adulterated goods. Jarchem contends that without evidence of defect in the destroyed IONAL, claims for damages are speculative, and the Court concurs. Spoliation, defined as the destruction of evidence pertinent to litigation, is acknowledged by WTI, which argues that the destroyed IONAL was not necessary for their case. However, WTI admits that part of their damages stem from the IONAL sold to Tyson that needed replacement. The dispute centers on causation, as WTI sold IONAL containing Jarchem's sodium diacetate to other customers without reported defects, suggesting not all IONAL was affected. Evidence indicates that the destroyed IONAL is vital to WTI’s damage claims, despite WTI's assertion that the core issue lies with Jarchem’s sodium diacetate, not the IONAL product itself. The Court agrees with Jarchem that testing a minuscule fraction of the destroyed IONAL is statistically irrelevant to the entire lot. While WTI may recover damages for proven defects caused by Jarchem’s sodium diacetate, these are distinct from damages related to the destroyed IONAL. Consequently, the Court grants Jarchem’s Motion in Limine, excluding all evidence regarding damages from the destroyed IONAL.

Jarchem’s Motion for Partial Summary Judgment and Motion in Limine have been granted. The Court finds that the facts presented by both parties are undisputed, with a detailed account referenced from a prior Order dated July 30, 2012. Under Section 303(c)(2) of the relevant law, individuals are not penalized for introducing adulterated or misbranded food products into interstate commerce if they can establish a valid guaranty from a U.S. resident. The Court agrees with Jarchem that WTI's brief statement does not sufficiently counter Jarchem's position, leading to the conclusion that WTI concedes this point. WTI's citation of 21 U.S.C. 350g to assert that specific Good Manufacturing Practices (GMPs) are mandated is dismissed, as that provision was not effective in 2009. Additionally, WTI references different potential contaminants identified by three laboratories and claims Jarchem's knowledge of FDA regulations based on a product specification form for Sodium Diacetate FCC. However, this form is not mentioned in the Amended Complaint, and WTI fails to cite specific FDCA regulations from 2009 that Jarchem allegedly violated. WTI's assertion of a contractual duty on Jarchem to comply with all laws does not clarify its fraud claim, as it does not specify any legal requirements Jarchem neglected. Consequently, since WTI has not met its burden on a key element of the fraud claim, the Court does not pursue Jarchem's argument regarding reasonable reliance. WTI's claim for punitive damages is contingent on the fraud claim's survival; thus, with the fraud claim dismissed, punitive damages are also unavailable. The Court notes WTI's decision to retain a defective product until litigation risks were resolved, raising questions about the rationale behind this choice.