Somersault Snack Co, LLC v. Baptista Bakery, Inc.

Background

Somersault Snack Co, LLC filed a breach-of-contract action against Baptista Bakery, Inc. The parties’ agreement, effective January 1, 2015, made Baptista the sole manufacturer of Somersault’s products. Somersault alleged that Baptista later announced a manufacturing-price increase of more than 70 percent, threatened to terminate the agreement, produced defective products, and prevented Somersault from inspecting manufacturing runs. The alleged defects included improperly sealed packaging and products that were overcooked, undercooked, or moldy.

Somersault’s sole cause of action alleged breach of the implied covenant of good faith and fair dealing, along with references to express contract provisions and an indemnification clause. Baptista moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that Somersault had not adequately alleged a contractual breach or recoverable damages. The agreement selected Delaware law, and the court applied Delaware law to the contract claim.

Express Contract Terms

The complaint did not clearly identify which express provisions Baptista allegedly breached. In its opposition, Somersault identified four provisions.

First, Somersault relied on paragraph 3.1, which required Baptista to supply products according to Somersault’s formulations and specifications. The court directed Somersault to amend its complaint to identify that provision and explain how Baptista’s conduct breached it.

Second, Somersault relied on paragraph 8.2(b), concerning products being merchantable and fit for human consumption. Because the complaint did not specifically allege that the defects made the products unfit for human consumption, the court directed Somersault to clarify those allegations.

Third, Somersault alleged that Baptista violated paragraph 9.4 by preventing inspections of its manufacturing facilities. The court held that this allegation was sufficiently pleaded at the motion-to-dismiss stage. Baptista’s argument that Somersault had other opportunities to inspect the products concerned the merits of the claim rather than whether the complaint adequately stated one.

Fourth, Somersault argued that Baptista breached indemnification provisions by refusing to indemnify it for damages caused by Baptista’s alleged breaches. The court held that the indemnification provisions could not serve as the basis for the initial breach-of-contract claim because an indemnification claim would arise after liability for breach had been established. The court dismissed the indemnification allegations without prejudice and stated that the issue was inappropriate to address at that stage.

The court granted Somersault leave to amend its complaint to address the identified deficiencies where possible.

Implied Covenant

Under Delaware law, a claim for breach of the implied covenant of good faith and fair dealing requires an alleged specific implied contractual obligation, a breach, and resulting damage. Somersault alleged implied terms that Baptista could not abandon quality-control procedures to punish Somersault or deprive it of the agreement’s benefits, and could not refuse to manufacture replacement products in a timely manner.

Baptista argued that the written agreement already addressed product quality and delivery remedies, leaving no room for implied terms. The court rejected that argument at the pleading stage. It found that the contract did not permit Baptista to abandon quality-control procedures when the parties disagreed about the contract and did not contain an express term governing the timing of product deliveries. The court therefore held that Somersault’s proposed implied terms could support a claim for breach of the implied covenant.

Damages

Somersault had to identify each category of damages it sought and the cause of action supporting each category in its amended complaint. The court noted that Somersault cited a Delaware statute governing direct damages for breach of warranty, but Somersault had not pleaded a breach-of-warranty claim or provided authority explaining what direct damages were available for its other claims.

The agreement barred consequential, incidental, indirect, special, punitive, and exemplary damages, including lost profits, lost revenues, and lost savings. Baptista argued that the bar required dismissal of Somersault’s request for consequential damages. Somersault argued that the limitation was unenforceable under the essential-purpose doctrine, which can make a contractual remedy unavailable when it fails to serve its intended purpose.

The court declined to decide at the pleading stage whether the limitation-of-liability provision was enforceable or whether that issue should be decided on summary judgment or at trial. It therefore denied Baptista’s motion to dismiss Somersault’s claim for consequential damages.

Disposition

The court granted in part and denied in part Baptista’s motion to dismiss. Somersault was ordered to file an amended complaint by December 4, 2019, addressing the deficiencies identified in the order.