Grocery Outlet, Inc. v. Naftali, Inc.

Background

Grocery Outlet, Inc. and its supplier, Naftali, Inc., sued each other over Naftali’s sale of pesticidal sanitary wipes. Naftali is described as a Florida corporation that markets and manufactures goods. Grocery Outlet is described as a supermarket retailer based in California. The wipes’ labels did not comply with state and federal law. After the Environmental Protection Agency notified Grocery Outlet of the labeling violations, Grocery Outlet recalled more than 160,000 wipes. Grocery Outlet later rejected the wipes and returned more than 40,000 units. Naftali offered approximately $75,000 for undamaged returned products, but Grocery Outlet sought a refund for all unsold wipes instead.

Naftali’s second amended answer included nine new affirmative defenses and three new counterclaims: breach of contract and breach of the implied promise of good faith and fair dealing, fraudulent inducement, and negligent misrepresentation. Naftali also re-alleged a breach-of-contract counterclaim from its earlier answer.

Motion to Strike

Grocery Outlet moved under Rule 12(f) of the Federal Rules of Civil Procedure to strike Naftali’s entire second amended answer. It argued that Naftali had violated Rule 15(a)(2) by adding claims and defenses without separately seeking permission, and that the amendments would cause unfair prejudice.

The court denied the motion to strike. It concluded that its earlier order had allowed Naftali to amend without expressly limiting the scope of the amendment to the previously dismissed counterclaims. The court also found that Grocery Outlet had not shown sufficient prejudice. The parties had exchanged only initial disclosures, Naftali’s factual allegations had not changed significantly, and Grocery Outlet had not shown that the amendments would require significant additional discovery or proof of different facts.

Motion to Dismiss

Grocery Outlet moved under Rule 12(b)(6), which permits dismissal when a pleading does not state a legally sufficient claim. The court accepted well-pleaded factual allegations as true for purposes of the motion but required enough facts to make the claims plausible. It also noted that fraud claims must describe the alleged misconduct with particular detail under Rule 9(b).

Breach of Contract and Implied Covenant

The court granted dismissal of Naftali’s first counterclaim, which asserted breach of contract and breach of the implied promise of good faith and fair dealing. The court held that Naftali had not adequately alleged harm, an element of both claims. Because the lack of alleged harm was dispositive, the court did not reach Grocery Outlet’s arguments about Naftali’s performance or Grocery Outlet’s alleged breach.

Naftali argued that it did not need to allege contract damages because it sought rescission, an equitable remedy intended to restore the parties as nearly as possible to their previous positions. The court rejected that argument. A party seeking rescission based on mistake still must allege injury or harm showing that enforcing the contract would be unconscionable, meaning excessively harsh or one-sided. The court found that Naftali’s alleged harm from Grocery Outlet’s demand for indemnification was hypothetical. It also noted that Naftali had received more than $1.8 million for the wipes. In addition, the court found that the contract expressly placed responsibility for compliance with applicable laws and regulations on Naftali, so Naftali bore the risk of the mistake it identified.

Fraudulent Inducement and Negligent Misrepresentation

The court granted dismissal of Naftali’s second and third counterclaims for fraudulent inducement and negligent misrepresentation. Both claims required Naftali to allege harm caused by the alleged misrepresentations. The court found that Naftali had not alleged a specific or tangible injury. Its claimed harm from Grocery Outlet’s indemnification demand remained hypothetical, and Naftali did not allege that the alleged misrepresentations proximately caused that demand.

Because the lack of alleged harm resolved these claims, the court did not reach Grocery Outlet’s arguments about the level of detail required under Rule 9(b) or justifiable reliance. The court also explained that negligent misrepresentation does not provide a basis for rescission under the cited California statute, and that fraud-based rescission still requires material injury.

Disposition

The court DENIED Grocery Outlet’s motion to strike Naftali’s second amended answer. It GRANTED Grocery Outlet’s motion to dismiss Naftali’s three new amended counterclaims without leave to amend.