Grocery Outlet, Inc. v. Naftali, Inc.

Background

During May and June 2020, Grocery Outlet contracted with Naftali to purchase 718,032 sanitizing-wipe units for $1,802,253.12. Grocery Outlet alleged that Naftali represented the wipes could sterilize surfaces, kill germs, and act as antibacterial products, and that they complied with federal and state law.

The California Department of Pesticide Regulation later found that two of the products were unregistered pesticides. The Environmental Protection Agency also identified the products as unregistered pesticides under the Federal Insecticide, Fungicide, and Rodenticide Act because their labels made pesticidal claims. Grocery Outlet recalled at least 160,015 units and later paid a $392,000 civil penalty under a settlement with the Environmental Protection Agency. Grocery Outlet alleged that $367,111.11 of that penalty related to Naftali’s products.

Grocery Outlet sued Naftali on seven theories: breach of contract, contractual indemnification, breach of express warranty, breach of implied contract, implied contractual indemnification, breach of the implied warranty of merchantability, and violation of California’s Unfair Competition Law. It sought damages, indemnification, punitive damages, attorney’s fees, and other relief.

Unfair-Competition Claim

Naftali moved to dismiss the Unfair Competition Law claim under Federal Rule of Civil Procedure 12(b)(6), arguing that Grocery Outlet lacked statutory standing. The court explained that the law protects consumers and competitors and generally does not allow a large or sophisticated corporate plaintiff to use it for a private contract dispute that does not involve the public or individual consumers.

Grocery Outlet did not dispute that it was a large or sophisticated corporation or that the contracts were between Grocery Outlet and Naftali. It argued that Naftali’s conduct affected the public because the wipes were sold to the public, recalled, and potentially harmful to consumers.

The court rejected that argument. It concluded that Grocery Outlet’s allegations centered on its private contractual relationship with Naftali, that the contracts were not form contracts, and that the complaint identified Grocery Outlet—not individual consumers or the public—as the injured party. The court therefore granted Naftali’s motion to dismiss the Unfair Competition Law claim. It also denied leave to amend, finding that amendment would be futile because the dispute remained a private business-to-business contract dispute.

Punitive Damages

Naftali initially filed a motion to strike the punitive-damages request. The court converted that motion into a Rule 12(b)(6) motion because a motion to strike is not the proper procedure for challenging a damages claim as legally unavailable.

Naftali argued that punitive damages were unavailable for claims based on contract and that Grocery Outlet had not adequately alleged malice or fraudulent intent. Grocery Outlet cited no contrary authority and agreed to withdraw its punitive-damages demand. The court therefore granted Naftali’s motion to dismiss the punitive-damages claim.

Attorney’s Fees and Disposition

Naftali withdrew its challenge to Grocery Outlet’s attorney’s-fees claim. The court denied that portion of the motion to strike as moot.

The final dispositions were: (1) Naftali’s motion to dismiss the Unfair Competition Law claim was granted, and leave to amend was denied; (2) Naftali’s motion to dismiss the punitive-damages claim was granted; and (3) Naftali’s motion to strike the attorney’s-fees claim was denied as moot. The opinion did not resolve Grocery Outlet’s remaining contract, indemnification, or warranty claims.