Vanlaw Food Products v. New England Country Foods CA4/3 ( 2023 )

Filed 06/21/23 Vanlaw Food Products v. New England Country Foods CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
VANLAW FOOD PRODUCTS, INC.,
Plaintiff and Appellant, G060848
v. (Super. Ct. No. 30-2017-00962844)
NEW ENGLAND COUNTRY FOODS, OPINION
LLC,
Defendant and Respondent.
Appeal from a judgment of the Superior Court of Orange County, Robert J.
Moss, Judge. (Retired judge of the Orange Super. Ct. assigned by the Chief Justice
pursuant to art. VI, § 6 of the Cal. Const.) Affirmed.
Magarian & DiMercurio, Mark D. Magarian and Krista L. DiMercurio for
Plaintiff and Appellant.
M.K. Hagemann and Michael K. Hagemann for Defendant and
Respondent.
INTRODUCTION
While the law recognizes oral and implied contracts, this case demonstrates
the wisdom of getting everything down in writing. The parties herein are packaged food
companies who entered into a business relationship but left many of the details inchoate,
even after operations began. Then, almost two years into the relationship, they
formalized their agreement in a signed writing. The trial court sifted through voluminous
documents and heard conflicting testimony regarding the agreement’s terms before
determining the appellant breached it. We affirm.
FACTS
Respondent New England Country Foods, LLC (NECF) is the successor to
Vermont Country Foods, a premium packaged food company started in 1994 by
entrepreneur Milton Peter Thomson (who goes by his middle name Peter) and his
partners. Thomson had been in the packaged consumer goods industry for over 20 years
by that time, and had successfully formed, run, and sold a marketing agency as well. In
1998, Vermont Country Foods developed a premium barbecue sauce which caught the
eye of grocery giant Trader Joe’s. The sauce, now christened “TJ’s Bold & Smoky
Kansas City Style Barbecue Sauce,” hit Trader Joe’s shelves in 1999, on its way to
becoming one of the most popular barbecue sauces in the country.
Vermont Country Foods initially produced the barbecue sauce in its own
Vermont manufacturing facility, but that changed around the mid aughts. In 2005,
Thomson and partners formed NECF to take over Vermont Country Foods’ business
operations. NECF outsourced the manufacturing to a company called Blossom Valley
Foods, located in Gilroy. In late 2013, Blossom Valley Foods indicated it would no
longer be able to produce the sauce to NECF’s requirements. Thomson then approached
appellant VanLaw Food Products, Inc. (VanLaw) to transition manufacturing operations
there. His main point of contact at VanLaw was John Gilbert, the company’s vice
president of sales and marketing and later president.
2
The two companies signed a mutual nondisclosure agreement to protect
proprietary information in December 2013, marking the beginning of their business
relationship. Thomson visited VanLaw’s Fullerton facility in January 2014, and on
January 31, 2014, informed Trader Joe’s that production was officially being moved from
Blossom Valley Foods to VanLaw.
The deal was as follows: Van Law would produce the sauces in 20-ounce
bottles, packed into cases by the dozen. The sauce would be produced turnkey, meaning
VanLaw would acquire everything required to produce and deliver the sauce to NECF as
a finished product ready for sale. The bottles would be stamped with paper labels and
would be delivered “FOB Van Law.”1 For each case of sauce, NECF would pay VanLaw
$14.50 within 30 days.
Initially, Trader Joe’s paid NECF for the barbecue sauce, and NECF then
cut a check to VanLaw. But in June 2014, at Trader Joe’s behest, and with both parties’
consent, the purse strings shifted from NECF to VanLaw. Trader Joe’s began issuing
purchase orders directly to VanLaw – and paying VanLaw directly as well. Because of
this new protocol, the payment terms shifted between VanLaw and NECF. VanLaw
agreed to pay NECF its cut via a royalty of $3.30 on every payment VanLaw received
from Trader Joe’s.2 VanLaw’s royalty checks were accompanied by backup calculations.
From the early days of the royalty arrangement, the parties had discussed
certain potential adjustments to the royalty. They agreed that 50 cents could be
subtracted per case for an additional cost associated with using pressure-sensitive labels
on the bottles instead of paper ones.3 And another 3.7 cents per case could be subtracted
1
“FOB” is an abbreviation for “freight on board,” or the point of pickup. Thus, “FOB Van Law”
meant the sauce would be picked up at VanLaw’s Fullerton plant.
2
This figure was based on the normal profit NECF was earning in selling the sauce directly to
Trader Joe’s for $17.80 per case.
3
These labels were necessary because of Trader Joe’s requirements for the design of the bottle
label. Paper labels are a thinner stock and glue must be applied to them on the assembly line. In contrast, pressure-
sensitive labels are thicker and come with glue pre-applied. Both parties agreed Trader Joe’s design would look
better on a pressure-sensitive label.
3
to account for an increase in the cost of tomato paste, a critical ingredient in NECF’s
barbecue sauce. Thomson testified that this so-called “tomato paste upcharge” would
only last for one crop year, a point Gilbert disputed.4
The parties did not formalize the royalty arrangement in a signed writing
until October of 2015, when Thomson and Gilbert executed an operating agreement made
retroactive to January 1, 2015. The operating agreement appears to have been more a by-
product of the parties’ negotiations over a low-cost sriracha sauce which NECF asked
VanLaw to develop in April 2015 for sale in prison commissaries in Texas.
Nevertheless, it contained important terms regarding the barbecue sauce arrangement.5
The agreement, which was to last for a term of three years, called for a
$3.30 royalty per 12 unit case “based on a sell price of $17.80 per case ‘FOB’
[VanLaw’s] Fullerton plant.” Royalties on each case accrued as of the day of shipment to
Trader Joe’s, and NECF was due to be paid by the end of the month after VanLaw
received payment.
The agreement also required the parties to make “best efforts” to “negotiate
price increase(s) with Trader Joe’s as justified by continued increases in input costs,”
with the “benefit of said price increases” to “accrue to the benefit of both Parties by
mutual agreement.” Further, the parties agreed that pricing would be reviewed on a
quarterly basis. The price could be adjusted “based on documented raw, packaging,
freight or operational changes, as mutually agreed to,” and any such adjustment could
potentially alter the royalty “as agreed to quarterly.” Amendments to the agreement
could be made “[o]nly in writing signed by all parties[.]”
4
As a practical result, neither side disputes the tomato paste upcharge of 3.7 cents per case was
proper at least for all royalties issued between July 1, 2014 and June 30, 2015 – the extent of the single crop year
following initiation of the royalty arrangement.
5
While disputes arose over the parties’ sriracha sauce relationship also, VanLaw seeks only to
reverse the trial court’s findings respecting the barbecue sauce.
4
This lawsuit was initiated by VanLaw in December of 2017 when it sought
damages from NECF because of excess raw materials it purchased to make sriracha sauce
for which NECF was unable to provide orders. But this appeal pertains to the cross-
complaint NECF filed in February 2019 for improprieties it claimed occurred in royalty
calculations on the barbecue sauce. Specifically, NECF alleged that VanLaw improperly
continued to deduct for the tomato paste upcharge long after the end of the 2014-2015
crop year. It further alleged VanLaw had improperly deducted 26 cents per case as a
fulfillment fee.
After a bench trial, the trial court issued a statement of decision finding in
favor of VanLaw on its complaint related to the sriracha sauce, but in favor of NECF on
its cross-complaint pertaining to the barbecue sauce. The trial court concluded that
VanLaw breached the agreement when it made the deductions since the operating
agreement did not expressly allow for them, and a signed writing was required for any
such deduction to be permissible. But because NECF conceded as to the limited-term
tomato paste upcharge and pressure-sensitive label charge, the trial court awarded
$115,571.31 in back royalties only as to the fulfillment fees and any tomato paste
upcharges occurring after the 2014-2015 crop year.
DISCUSSION
I. NECF’s Motion to Dismiss the Appeal
We first consider NECF’s contention that VanLaw’s appeal should be
dismissed because VanLaw has already voluntarily accepted the benefits of the trial
court’s judgment. Some procedural background is required to assess the motion.6
Several months before the bench trial in this matter, NECF sought leave to
amend its cross-complaint in order to add allegations about VanLaw’s attempts to clone
6
In order to do so, we grant NECF’s request for judicial notice of the federal court filings in New
England Country Foods, LLC v. VanLaw Food Prods., Inc. (C.D.Cal. 2022) 2022 U.S.Dist. LEXIS 109555 (case
No. 8:21-cv-01060-DOC-ADS).
5
NECF’s proprietary barbecue sauce and create a competing relationship with Trader
Joe’s. NECF contended this information was obtained in discovery, although it appears
the motion was prompted by a change in strategy. With VanLaw opposing leave to
amend the cross-complaint, the trial court denied NECF’s motion, so NECF pursued
these allegations by way of a separate lawsuit in federal court.
VanLaw filed a motion to dismiss the federal action, arguing in part that the
case was barred by res judicata or claim preclusion because trial had already occurred in
this matter. The federal district court rejected VanLaw’s claim and issue preclusion
argument, but granted its motion to dismiss based on the existence of a limitation of
liability clause in the parties’ agreement. Indeed, the federal court rejected the claim
preclusion argument specifically because VanLaw had chosen to pursue this appeal. The
federal court’s ruling was issued on November 23, 2021, not two weeks after VanLaw
filed the notice of appeal herein.
In this motion, NECF makes four arguments in favor of dismissing
VanLaw’s appeal. First, it claims VanLaw sought the benefits of the judgment by way of
its motion to dismiss while also seeking the right to modify or vacate it. Second, it
contends VanLaw should be judicially estopped from appealing based on the inconsistent
position it took in the federal case. Third, it argues VanLaw made binding admissions to
the federal court about the finality of the judgment. Finally, it urges us to dismiss the
appeal based on unclean hands. We are not persuaded by any of these arguments.
A. Voluntary Acceptance of Benefits
“It is the general rule that the voluntary acceptance of the benefit of a
judgment or order is a bar to the prosecution of an appeal, since the right to accept the
fruits of the judgment and the right to appeal therefrom are wholly inconsistent, and an
election to take one is a renunciation of the other. [Citations.] An exception to the
general rule exists where the appellant is concededly entitled to the benefits which are
accepted and a reversal will not affect the right to those benefits.” (Mathys v. Turner
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(1956) 46 Cal.2d 364, 365.) However, as we have stated, acceptance of the benefit must
be “‘clear, unmistakable, and unconditional [citation.]’” (Satchmed Plaza Owners Assn.
v. UWMC Hospital Corp. (2008) 167 Cal.App.4th 1034, 1041-1042.)
At the same time, “‘[i]t is a well established policy that, since the right of
appeal is remedial in character, our law favors hearings on the merits when such can be
accomplished without doing violence to applicable rules. Accordingly in doubtful cases
the right to appeal should be granted.’ [Citations.]” (Lee v. Brown (1976) 18 Cal.3d 110,
113.)
In essence, NECF asserts VanLaw cannot argue claim preclusion by
operation of a judgment it is concurrently appealing. But VanLaw was not actually
appealing the ruling when it filed its motion to dismiss the federal lawsuit in August
2021. Indeed, there was no ruling to appeal until one month later. This appears to be one
of those “doubtful cases” in which we must avoid cutting off an appeal on the merits. A
party must be given at least a little latitude to aggressively defend one case while
contemplating the appeal of another, even if it is related.
B. Judicial Estoppel
We also decline to apply judicial estoppel. The doctrine prevents a party
from asserting a position in one case that is inconsistent from the position taken in
another case, whether or not the position is the subject of a final judgment. (See Jackson
v. County of Los Angeles (1997) 60 Cal.App.4th 171, 182.) It “applies when ‘(1) the
same party has taken two positions; (2) the positions were taken in judicial or quasi-
judicial administrative proceedings; (3) the party was successful in asserting the first
position (i.e., the tribunal adopted the position or accepted it as true); (4) the two
positions are totally inconsistent; and (5) the first position was not taken as a result of
ignorance, fraud, or mistake.’ [Citations.]” (Aguilar v. Lerner (2004) 32 Cal.4th 974,
986-987.) VanLaw was not successful in asserting its claim preclusion argument in the
federal court, thus application of judicial estoppel is inappropriate.
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C. Judicial Admission
Similarly, NECF claims VanLaw made a judicial admission as to the
finality of the judgment. We disagree because judicial admissions are almost universally
admissions of fact. (Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 746.)
Whether or not the judgment of the trial court was final is an issue of law.
D. Unclean Hands
This equitable defense is applied in cases in which a plaintiff has engaged
in bad faith conduct directly relating to the claims at issue. (See Kendall-Jackson
Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 979.) But its application
“‘depends on the analogous case law, the nature of the misconduct, and the relationship
of the misconduct to the claimed injuries.’ [Citation.]” (Aguayo v. Amaro (2013) 213
Cal.App.4th 1102, 1110.) NECF provides citations to no analogous case law in which
the defense was applied to dismiss an appeal.
II. VanLaw’s Appeal
Having decided to review the trial court’s decision on its merits, we find no
reversible error. VanLaw argues the operating agreement did not require the contested
deductions to be in writing. Further, it asserts the trial court lacked substantial evidence
to conclude the deductions were unauthorized and therefore a breach of contract.
A. The Parties’ Agreement
Central to our inquiry is an understanding of the scope and terms of the
parties’ agreement. Was the operating agreement the exclusive delineation of the royalty
arrangement’s terms? Or was there other evidence defining them? And depending on the
answer to the previous questions, what deductions were ultimately permissible?
“Contract interpretation ‘is essentially a judicial function to be exercised
according to the generally accepted canons of interpretation so that the purposes of the
instrument may be given effect. [Citations.]’ [Citation.] In interpreting a contract, the
court considers the language of the contract, the circumstances under which the parties
8
negotiated or entered into the contract, the object, nature and subject matter of the
contract, and the subsequent conduct of the parties. (Morey v. Vannucci (1998) 64
Cal.App.4th 904, 912.)” (Kitty-Anne Music Co. v. Swan (2003) 112 Cal.App.4th 30, 37.)
When dealing with a written contract, we must first independently
determine whether the writing is ambiguous. If it is ambiguous, extrinsic evidence can be
considered as to the writing’s meaning, and if the trial court’s interpretation of the writing
“rests on its resolution of conflicting evidence, ‘any reasonable construction will be
upheld as long as it is supported by substantial evidence.’ [Citation.]” (Thompson v.
Asimos (2016) 6 Cal.App.5th 970, 986.) But some cases, like this one, require us to
determine whether the writing is itself a complete expression of the parties’ agreement.
This is also a question of law. (See Heffner v. Gross (1919) 179 Cal. 738, 742.)
The record and briefing leave us convinced the parties, and consequently
the trial court, lacked a clear understanding of what constituted the agreement. VanLaw
says royalty deductions did not need to be in writing; indeed, it claims the deductions
were not modifications at all, but rather, terms to which Thomson either agreed or
acquiesced from the get go. NECF, on the other hand, contends the deductions were
modifications requiring a writing, and if the parties agreed to them orally, the
requirement of a writing would have to have been waived – which, they note, was not an
argument made before the trial court. This left the trial court unenviably in the position
of trying to enforce as best it could what it discerned to be the intentions of the parties.
But an important fact went unnoticed: the operating agreement was not
actually effective until January 2015, almost a year after NECF decided to move its
production to VanLaw, and nearly six months after the royalty arrangement began. Why
is this important? Because for almost six months, no written contract governed the
relationship, which means for that period of time, the parties’ contract was a mixture of
terms or desires communicated and accepted either orally or in writing, and conduct
implying agreement. Those terms require examination.
9
This is especially so because the operating agreement itself contains no
language of integration; nothing to indicate the document executed in October 2015
contains all agreed-upon terms. The trial court should have considered collateral
evidence to interpret its terms, including the parties’ conduct and the surrounding
circumstances. (See Brawthen v. H & R Block, Inc. (1972) 28 Cal.App.3d 131, 137.) To
the extent the parties’ words or conduct in 2014 and 2015 indicated certain deductions
could be made, those deductions must be enforced, whether in writing or not.
B. The Deductions
With this backdrop, we can discern a certain logic behind NECF’s choice to
pursue certain deductions in this litigation while conceding others.7 In January 2014,
before their first run, Thomson indicated to Gilbert that NECF would be willing to absorb
the cost of pressure-sensitive labels for the time being because Thomson was hoping to
get Trader Joe’s permission to switch to the paper labels. Clearly, such permission was
never granted, and so it was only fair for NECF to take the hit. Similarly, Gilbert had
stressed repeatedly to Thomson, beginning in June 2014, that VanLaw was paying
significantly higher prices for tomato paste than normal. He was asking for help to
absorb some of the shock. Thomson appears to have understood VanLaw did not control
the price of wholesale tomato paste; hence his continued monitoring of the agricultural
data. And in September 2015, he asked Gilbert to remove the upcharge effective in
August 2015. This implies he was amenable to paying it up until the August 2015
timeframe, when he felt conditions had fairly improved, and he communicated the same
to VanLaw.
So, NECF’s concession on the two aforementioned deductions was
apropos. The 26-cent fulfillment fee is a different story. There is no evidence in the
record that NECF ever agreed to pay any fulfillment fee to VanLaw. The first time a
7
VanLaw implies that NECF’s decision to concede the temporary tomato paste upcharge and
pressure-sensitive label deduction is hypocritical if the operating agreement does not allow deductions at all.
10
fulfillment fee appears in any of the royalty backup documentation is November of 2014,
showing the fee was being charged retroactive to June of that year. When the parties first
began talking in January 2014, the plan was for NECF to pay VanLaw $14.50 for the
production of the sauce. No additional fee would have been required. When the royalty
arrangement began in mid-2014, Gilbert notified Thomson that the new arrangement
would be more costly on VanLaw’s end than a “straight copacking arrang[e]ment.” He
wanted them to discuss it, but it does not appear the parties ever agreed on how to handle
the issue. In a July 29, 2014 e-mail, Thomson claimed VanLaw “only recently
communicated to NECF” about the fulfillment charge. And he suggested NECF might
have chosen to handle things differently had he known such a fee would be assessed.
Van Law argues NECF continued to accept royalty payments minus the
deductions. As a result, it contends, the deductions were accepted and authorized
pursuant to the parties’ course of dealing, citing Southern California Acoustics Co. v.
C.V. Holder, Inc. (1969) 71 Cal.2d 719, 722 (Holder). Holder states “[s]ilence in the
face of an offer is not an acceptance, unless there is a relationship between the parties or a
previous course of dealing pursuant to which silence would be understood as
acceptance.” (Ibid.) The problem with VanLaw’s argument is twofold. First, there was
no evidence the parties ever agreed silence would constitute acceptance. But second,
VanLaw seems to concede that Thomson and Gilbert were under differing impressions as
to what the 26-cent fee covered. In its opening brief, it states Thomson believed the
fulfillment fee was for freight, whereas Gilbert understood it to be a number of costs
associated with fulfilling orders. If the two sides didn’t even agree as to what the fee
was, we can hardly say the trial court lacked substantial evidence to find it unauthorized.
We also cannot help but notice the operating agreement contains specific
language that would allow the parties to adjust both the sale price to Trader Joe’s and the
royalty payable to NECF as necessitated by conditions. But the parties would have to
mutually agree to such changes. And to add adjustments necessary as a result of
11
increased input costs on VanLaw’s end, it would need to document such costs. There is
no evidence the increased costs were documented, aside from being mentioned in e-mail
correspondence. This is another indication the fulfillment fee was unauthorized.
In sum, we think the evidence supports the trial court’s judgment.
DISPOSITION
Respondent’s motion to dismiss the appeal is denied. The judgment is
affirmed. Respondent is to recover its costs on appeal.
BEDSWORTH, ACTING P. J.
WE CONCUR:
MOORE, J.
DELANEY, J.
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