Court Opinion

ID: 9907544
Source: CourtListenerOpinion
Date Created: 2023-12-06 18:01:12.302996+00
Date Added: 2024-06-11T09:59:51.800073
License: Public Domain

FOR PUBLICATION

     UNITED STATES COURT OF APPEALS
          FOR THE NINTH CIRCUIT

NEW ENGLAND COUNTRY                            No. 22-55432
FOODS, LLC, a Vermont Limited
Liability Company,                                D.C. No.
                                               8:21-cv-01060-
                Plaintiff-Appellant,             DOC-ADS

    v.                                           ORDER
                                               CERTIFYING
VANLAW FOOD PRODUCTS, INC.,                   QUESTION TO
a California corporation,                     THE SUPREME
                                                COURT OF
                Defendant-Appellee.            CALIFORNIA

         Appeal from the United States District Court
            for the Central District of California
          David O. Carter, District Judge, Presiding

           Argued and Submitted October 17, 2023
                    Pasadena, California

                   Filed December 6, 2023

    Before: Richard A. Paez and Holly A. Thomas, Circuit
          Judges, and Jed S. Rakoff, * District Judge.

                             Order

*
 The Honorable Jed S. Rakoff, United States District Judge for the
Southern District of New York, sitting by designation.
2 NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC.

                          SUMMARY **

            Certification Order / California Law

   The panel certified the following question to the
California Supreme Court:

        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?

                             ORDER

    We respectfully ask the Supreme Court of California to
exercise its discretion to decide the certified question set
forth in section II of this order. We provide the following
information in accordance with California Rule of Court
8.548(b).
                I. Administrative Information
     The caption of this case is:
                             No. 22-55432
      NEW ENGLAND COUNTRY FOODS, LLC, a
 Vermont Limited Liability Company, Plaintiff-Appellant,

**
  This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
  NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC. 3

                               v.
      VANLAW FOOD PRODUCTS, INC., a California
          corporation, Defendant-Appellee.
   The names and addresses of counsel for the parties are:

       For Plaintiff-Appellant New England
       Country Foods, LLC: Michael K. Hagemann,
       M.K. Hagemann, P.C., 1801 Century Park
       East, Suite 2400, Century City, California
       90067.
       For Defendant-Appellee Vanlaw Food
       Products, Inc.: Krista L. DiMercurio, Mark
       D. Magarian, Magarian and DiMercurio,
       APLC, 20 Corporate Park, Suite 255, Irvine,
       California 92606.

   If our request for certification is granted, we designate
New England Country Foods, LLC as petitioner. It is the
appellant before our court.
                  II. Certified Question
    We certify to the Supreme Court of California the
following question of state law:

       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?

We certify this question pursuant to California Rule of Court
8.548. The answer to this question will determine the
outcome of the appeal currently pending in our court. We
4 NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC.

will accept and follow the decision of the California
Supreme Court as to this question. Our phrasing of the
question should not restrict the California Supreme Court’s
consideration of the issues involved.
                   III. Statement of Facts
   On June 16, 2021, appellant, New England Country
Foods (“NECF”), sued appellee, Vanlaw Food Products
(“Vanlaw”). The allegations in the complaint are as follows.
    In 1999, NECF began selling a barbeque sauce with
several proprietary aspects to Trader Joe’s, which in turn
sold it to the public. After initially manufacturing the product
itself, NECF entered into an “Operating Agreement” with
Vanlaw, whereby Vanlaw agreed to manufacture NECF’s
barbeque sauce. Near the end of the agreement, Vanlaw
offered to “clone” NECF’s barbeque sauce and sell it
directly to Trader Joe’s, effectively undercutting NECF.
Trader Joe’s subsequently accepted and terminated its 19-
year relationship with NECF as a result. Vanlaw was
ultimately unable to clone the barbeque sauce, and Trader
Joe’s pursued an alternative option.
    The contractual relationship between NECF and Vanlaw
was governed by a Mutual Non-Disclosure Agreement and
Operating Agreement. NECF contends that the Mutual Non-
Disclosure Agreement forbade Vanlaw from reverse
engineering NECF’s barbeque sauce. NECF therefore sued
Vanlaw, asserting five causes of action: (1) breach of
contract, for breaching the prohibition on reverse
engineering in the Mutual Non-Disclosure Agreement and
the implied covenant of good-faith and fair dealing; (2)
intentional interference with contractual relations; (3)
intentional interference with prospective economic relations;
(4) negligent interference with prospective economic
  NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC. 5

relations; and (5) breach of fiduciary duty. In its initial
complaint, NECF sought past and future lost profits,
attorneys’ fees, litigation costs, and punitive damages.
    However, the Operating Agreement contained a
“limitation on liability” clause that stated, “[t]o the extent
allowed by applicable law: (a) in no event will either party
be liable for any loss of profits, loss of business, interruption
of business, or for any indirect, special, incidental or
consequential damages of any kind[.]” In addition, an
indemnification provision stated, “in no event shall either
party be liable for any punitive, special, incidental or
consequential damages of any kind (including but not
limited to loss of profits, business revenues, business
interruption and the like).”
    Vanlaw moved to dismiss the complaint, arguing, in
relevant part, that the foregoing clauses in the Operating
Agreement barred NECF’s claims. The district court agreed
and dismissed NECF’s complaint with leave to amend. The
district court concluded that the limitation of liability clauses
barred the complaint because they only permitted NECF to
recover “direct damages or injunctive relief,” yet NECF was
attempting to recover “past and future lost profits, attorneys’
fees and costs, and punitive damages.” The district court also
found that the limitation of liability clauses were permissible
under California law because California Civil Code Section
1668 only “prevent[s] contracts that completely exempt
parties from liability, not simply limit damages.” However,
the district court granted NECF “leave to amend its
[c]omplaint to seek remedies permitted under the Operating
Agreement and/or to plead why the available remedies are
unavailable or so deficient as to effectively exempt
[appellee] from liability.”
6 NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC.

    NECF then amended its complaint to add two new
allegations: (1) that its harm was only in the “form of lost
profits (both past and future)” and (2) “the limitation-of-
liability provisions in the Operating Agreement . . . if
applied, would completely exempt Defendant from liability
from the wrong alleged herein because said provisions
purport to bar all claims for, ‘loss of profits.’” Vanlaw again
moved to dismiss the complaint, arguing that the limitation
of liability clauses in the Operating Agreement still barred
NECF’s lawsuit. The district court agreed and dismissed
NECF’s first amended complaint with prejudice. The district
court again held that the limitation of liability provision was
permissible under California Civil Code Section 1668
because it “does not bar all liability, just liability for specific
types of relief.” NECF could still seek unpaid royalties,
direct damages, or injunctive relief.
         IV. Explanation of Certification Request
    The dispositive issue on appeal is whether contractual
limitation of liability clauses for intentional wrongs that bar
certain forms of damages, but not all possible damages, are
valid under California Civil Code Section 1668. There is an
unresolved split of authority on this question among
California state courts.
    In general, limitation of liability clauses are permissible.
See Lewis v. YouTube, LLC, 244 Cal. App. 4th 118, 125
(2015). However, California Civil Code Section 1668 limits
the permissible scope of such clauses. It provides that “[a]ll
contracts which have for their object, directly or indirectly,
to exempt anyone from responsibility for his own fraud, or
willful injury to the person or property of another, or
violation of law, whether willful or negligent, are against the
policy of the law.” Cal. Civ. Code § 1668. The California
  NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC. 7

Supreme Court has explained that an “exculpatory clause
[that] affects the public interest” is invalid under this
statutory provision. See Tunkl v. Regents of Univ. of Cal., 60
Cal. 2d 92, 98–104 (1963) (invaliding an exculpatory
provision in a hospital-patient contract); Henrioulle v. Marin
Ventures, Inc., 20 Cal. 3d 512, 519–21 (1978) (invalidating
exculpatory provisions in residential leases). In addition, the
California Supreme Court has held that provisions
exculpating all liability for “intentional wrongdoing” and
“gross negligence” are invalid under Section 1668. See
Westlake Cmty. Hosp. v. Superior Ct., 17 Cal. 3d 465, 479
(1976) (holding that a bylaw that “bar[red] . . . plaintiff’s
claim based on the intentional wrongdoing of the hospital or
its staff” was invalid under Section 1668 (emphasis in
original)); City of Santa Barbara v. Superior Ct., 41 Cal. 4th
747, 751 (2007) (holding “that an agreement made in the
context of sports or recreational programs or services,
purporting to release liability for future gross negligence,
generally is unenforceable as a matter of public policy”).
Accordingly, Section 1668 will “invalidate[] contracts that
purport to exempt an individual or entity from liability for
future intentional wrongs,” “gross negligence,” and
“ordinary negligence when the public interest is involved
or . . . a statute expressly forbids it.” Spenser S. Busby,
APLC v. BACTES Imaging Sols., LLC, 74 Cal. App. 5th 71,
84 (2022) (internal quotation marks omitted) (quoting
Frittelli, Inc. v. 350 N. Canon Drive, LP, 202 Cal. App. 4th
35, 43 (2011)).
   However, the California Supreme Court has not
addressed the precise question at the center of this appeal:
whether a limitation of liability clause that exempts a party
from liability for some but not all possible damages is
permissible under California Civil Code Section 1668.
8 NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC.

California’s lower courts are currently split on the issue.
Some California courts have upheld such clauses. See, e.g.,
Farnham v. Superior Ct., 60 Cal. App. 4th 69, 77 (1997)
(finding “that a contractual limitation on the liability of
directors for defamation arising out of their roles as directors
is equally valid where, as here, the injured party retains his
right to seek redress from the corporation” (emphasis in
original)); CAZA Drilling (Cal.), Inc. v. TEG Oil & Gas
U.S.A., Inc., 142 Cal. App. 4th 453, 475 (2006) (“[T]he
challenged provisions . . . represent a valid limitation on
liability rather than an improper attempt to exempt a
contracting party from responsibility for violation of law
within the meaning of [S]ection 1668.”). Other courts have
invalidated or acknowledged the potential invalidity of such
clauses. See Klein v. Asgrow Seed Co., 246 Cal. App. 2d 87,
98–101 (1966) (finding a limitation of liability statement
void under Section 1668); Health Net of Cal., Inc. v. Dep’t
of Health Servs., 113 Cal. App. 4th 224, 239 (2003)
(declining to address the precise issue but noting that
“[S]ection 1668 has, in fact, been applied to invalidate
provisions that merely limit liability”).
    The statutory language of Section 1668 seems
susceptible to both readings. The use of the word “exempt”
in the statute may indicate that only provisions that
categorically bar all liability are invalid. However, when
read within its broader context—that “all contracts which
have for their object, directly or indirectly, to exempt anyone
from responsibility”—the term “exempt” may be interpreted
to mean that even liability provisions that bar only certain
kinds of damages run afoul of this statute, because they
could have the indirect effect of effectively exempting a
party from liability. The guidance of the California Supreme
  NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC. 9

Court on this issue is critical to clarifying the meaning of this
statutory language.
    This unresolved issue of state law is pivotal in this case
and important for all parties who contract under California
law. Count Two, intentional interference with contractual
relations, and Count Three, intentional interference with
prospective economic relations, are intentional wrongs. See
Ramona Manor Convalescent Hosp. v. Care Enters., 177
Cal. App. 3d 1120, 1130–31 (1986). Count Five, breach of
the fiduciary duty of loyalty, is “a willful injury to the . . .
property of another under Civil Code [S]ection 1668.”
Neubauer v. Goldfarb, 108 Cal. App. 4th 47, 56–57 (2003).
    If the limitation of liability clauses in the Operating
Agreement are permissible under Section 1668, the district
court’s decision to dismiss these causes of action must stand.
However, if a limitation of liability clause cannot limit
material damages for intentional wrongs, the district court’s
decision must be reversed, and these causes of action must
be permitted to proceed.
    Thus, whether a limitation of liability clause that limits
some or even most, but not all, damages for intentional
wrongs is permissible will determine whether plaintiff is
permitted to proceed with these claims. Accordingly, we
certify this question to the California Supreme Court.
                V. Accompanying Materials
    The Clerk is hereby directed to file in the Supreme Court
of California, under official seal of the United States Court
of Appeals for the Ninth Circuit, copies of all relevant briefs
and excerpts of the record, and an original and ten copies of
this order and request for certification, along with a
10 NEW ENGLAND CTRY. FOODS, LLC V. VANLAW FOOD PROD., INC.

certification of service on the parties, pursuant to California
Rule of Court 8.548(c), (d).
    This case is withdrawn from submission. Further
proceedings before this court are stayed pending final action
by the Supreme Court of California. The Clerk is directed to
administratively close this docket pending further order. The
parties shall notify the clerk of this court within seven days
after the Supreme Court of California accepts or rejects
certification, and again within seven days if that court
accepts certification and subsequently renders an opinion.
The panel retains jurisdiction over further proceedings.
   QUESTION CERTIFIED.