Copley v. Bactolac Pharmaceutical, Inc.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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CHARLES COPLEY, JASON EVANS,

HUMBERTO GARCIA, LUZ

ANGELINA GARCIA, JOAN

MCDONALD, JOHN PETERSON, MEMORANDUM AND ORDER

BETTY PRESSLEY, NATALIE Case No. 18-CV-575 (FB) (PK)

ROBERTS, NORMAN SKARE,

individually and as person representative

for BETTY SKARE, DAVID STONE,

and KAYE WINK, individually and as

next of kin of DONALD WINK,

Plaintiffs,

-against-

BACTOLAC PHARMACEUTICAL,

INC.; NATURMED, INC. d/b/a

INSTITUTE FOR VIBRANT LIVING;

and INDEPENDENT VITAL LIFE,

LLC,

Defendants.

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Appearances:

For the Plaintiffs: For Defendant Bactolac:

JAMES J. BILSBORROW HOWARD A. FRIED

PETER SAMBERG WALTER H. SWAYZE III

Weitz & Luxenberg, P.C. CAMERON W. BROWN

700 Broadway Segal McCambridge Singer & Mahoney

New York, New York 10003 850 Third Avenue, Suite 1100

New York, New York 10022

For Defendant NaturMed:

SHEILA CARMODY

COURTNEY HENSON

Snell and Wilmer L.L.P.

400 East Van Buren Street, Suite 1900

Phoenix, Arizona 85004

KAREN CAMPBELL

JOHN A. ANSELMO

Lewis Brisbois

77 Water Street, 21st Floor

New York, New York 10005

BLOCK, Senior District Judge:

Defendant Bactolac Pharmaceutical, Inc. (“Bactolac”), has made three

motions in this putative multi-state class action. First, it moves to dismiss some of

the plaintiffs’ claims pursuant to Federal Rule of Civil Procedure 12(b)(6). Second,

it moves to strike plaintiffs’ prayer for punitive damages. Third, it moves for

judgment on the pleadings on the cross-claims of its co-defendant, Naturmed, Inc.

d/b/a Institute for Vibrant Living (“NaturMed”), pursuant to Federal Rule of Civil

Procedure 12(c).

For the following reasons, the first motion is granted in part and denied in

part. The second is denied in its entirety. The third is granted in part and denied in

part.

I. MOTION TO DISMISS PLAINTIFFS’ CLAIMS

Although the plaintiffs’ complaint runs to 83 pages, the salient facts are

relatively straightforward. The plaintiffs used “All Day Energy Greens” (“ADEG”),

a dietary supplement that they claim was a “dangerous mixture that resulted in

serious illness and/or death among those who consumed it.” Am. Compl. ¶ 2.

ADEG was designed, marketed, distributed, and sold by NaturMed. The

actual product, however, was blended and packaged by Bactolac pursuant to a

contract with NaturMed. After receiving customer complaints, NaturMed

voluntarily recalled ADEG beginning in 2016.

Invoking the Court’s jurisdiction under the Class Action Fairness Act, the

plaintiffs—who hail from ten different states—sued NaturMed, its alleged

successor-in-interest, Independent Vital Life, LCC, and Bactolac in 2018. Their

general theory is that ADEG was not safe for human consumption because Bactolac

failed to follow NaturMed’s contractual instructions by adding inferior ingredients.

That theory was initially presented in thirty-six separate claims under the laws

of twelve different states, in addition to general common-law. Fortunately, the Court

need not address all thirty-six as the plaintiff have withdrawn thirteen claims in

response to the motion to dismiss; a fourteenth is asserted only against NaturMed.

Of the remaining twenty-two claims, Bactolac has not moved to dismiss fourteen.

Thus, the parties’ dispute is focused on eight claims, which the Court

addresses in turn.

Claim I

Claim I alleges, on behalf of all plaintiffs, that Bactolac violated the federal

Magnuson-Moss Warranty Act, 15 U.S.C. §§ 2301-2310. That act provides a federal

cause of action for breach of warranty under state law. See id. § 2310(d)(1). Thus,

“claims under the Magnuson–Moss Act stand or fall with [the plaintiff’s] express

and implied warranty claims under state law.” Clemens v. DaimlerChrysler Corp.,

534 F.3d 1017, 1022 (9th Cir. 2008). Since Bactolac has not moved to dismiss all

of the state-law warranty claims, the federal claim survives as well.

Claim III

Claim III alleges, on behalf of all plaintiffs, that Bactolac violated § 349 of

New York’s General Business Law, which prohibits “[d]eceptive acts or practices

in the conduct of any business, trade or commerce or in the furnishing of any service

in this state.” Since no plaintiff is a New York resident, the claim is apparently

premised on the fact that Bactolac is headquartered on Long Island.

In Goshen v. Mutual Life Insurance Co. of New York, 98 N.Y.2d 314 (2002),

the New York Court of Appeals held that “the transaction in which the consumer is

deceived must occur in New York.” Id. at 324. It then stated that “to qualify as a

prohibited act under the statute, the deception of a consumer must occur in New

York.” Id. at 325.

Goshen’s language had led to what the Second Circuit described as “two

divergent lines of decisions.” Cruz v. FXDirect Dealer, LLC, 720 F.3d 115, 123 (2d

Cir. 2013). The first focuses on “where the deception of the plaintiff occurs and

require[s], for example, that a plaintiff actually view a deceptive statement while in

New York.” Id. (citing cases). The second focuses on “where the underlying

deceptive ‘transaction’ takes place, regardless of the plaintiff's location or where the

plaintiff is deceived.” Id. (citing cases).

Here, neither the transaction nor the alleged deception occurred in New York.

Indeed, there was no contact at all between the plaintiffs and Bactolac. To be sure,

Bactolac allegedly deceived NaturMed by representing that it had complied with the

latter’s instructions, but that is a matter between those two companies. In any event,

§ 349 covers only “consumer-oriented” conduct. See Oswego Laborers’ Local 214

Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 24 (1995) (“[S]ection

349 is directed at wrongs against the consuming public.”). “Accordingly, private

contractual disputes which are unique to the parties do not fall within the ambit of

the statute.” Yellow Book Sales & Dist. Co. v. Hillside Van Lines, Inc., 950 N.Y.S.2d

151, 154 (2d Dep’t 2012).

Claim V

Plaintiff Betty Pressley, an Alabama resident, alleges that Bactolac violated

Alabama’s Deceptive Trade Practices Act. Bactolac argues that the claim is barred

by the act’s one-year statute of limitations, see Ala. Code § 8-19-14. Pressley alleges

that she experienced gastrointestinal illness in 2014 and received a recall notice in

2016; the complaint was not filed until 2018.

Under Alabama law, the statute of limitations on a fraud claim does not begin

to run “until the aggrieved party discovers or, in the exercise of reasonable care,

should have discovered, the facts constituting the fraud.” Wheeler v. George, 39 So.

3d 1061, 1081 (Ala. 2009). “Therefore, the limitations period commences when the

plaintiff discovers the fraud or when facts are known which would put a reasonable

mind on notice that facts to support a claim of fraud might be discovered upon

inquiry.” Id. (citations and internal quotation marks omitted).

The Court cannot say, as a matter of law, that experiencing illness and

receiving a recall notice two years later would put a reasonable person on even

inquiry notice of a connection to ADEG. Even if it would have, neither the product

nor the recall provided any facts as to Bactolac’s role. See id. at 1082 (“[T]he

question of when the party discovered or should have discovered the fraud is

generally one for the jury.” (citation and internal quotation marks omitted)).

Claim IX

Plaintiff Jason Evans, a California resident, alleges that Bactolac violated

§ 17500 of California’s Business and Professions Code, which prohibits untrue or

misleading statements “in any newspaper or other publication, or any advertising

device, or by public outcry or proclamation, or in any other manner or means

whatever, including over the Internet.” Plaintiff’s theory of liability is that Bactolac

“knowingly and purposefully substituted cheaper ingredients not called for by

NaturMed’s label”; “falsely certified to NaturMed that it had used only those

ingredients listed on the label”; and “affixed these labels to canisters of All Day

Energy despite knowing that the ingredients contained therein did not match those

listed on the label.” Pls’. Mem. of Law 12. The first two items clearly do not

constitute advertising. With respect to the third, a product label could arguably

qualify, but it is undisputed that NaturMed produced the labels for ADEG. A

company that affixes a label at the behest of another company responsible for a

product’s marketing and distribution to the pubic (as NaturMed was for ADEG) does

not, in any reasonable sense, “advertise” the product.

Claim XIX

Plaintiff Natalie Roberts, a Missouri resident, alleges that Bactolac breached

an implied warranty under Missouri law. “Under Missouri law, a remote purchaser

may bring suit against the manufacturer for breach of implied warranties.”

Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 129 (Mo. 2010).

However, the purchaser must also provide “notice to the seller of the injury.” Hope

v. Nissan N. Am., Inc., 353 S.W.3d 68, 90 (Mo. Ct. App. 2011). The complaint

alleges no such notice.

Claim XXIX

Plaintiff Charles Copley, a Virginia resident, alleges that Bactolac violated

Virginia’s Consumer Protection Act, which prohibits various deceptive practices

“by a supplier in connection with a consumer transaction.” Va. Code § 59.1-200(A).

As plaintiffs correctly argue, “a direct sale to a consumer is not required for the

transaction to be covered by the [Act].” Alexander v. Southeastern Wholesale Corp.,

978 F. Supp. 2d 615, 622 (E.D. Va. 2013). Thus, unlike with some of the other

statutes at issue, it is not dispositive that Bactolac did not directly interact with

consumers.

However, the plaintiffs must still establish that Bactolac is a “supplier,” which

is defined as a “seller, lessor, licensor or professional who advertises, solicits, or

engages in consumer transactions, or a manufacturer distributor, or licensor who

advertises and sells, leases or licenses goods and services to be resold, leased or

sublicensed by other persons in consumer transactions.” Va. Code § 59.1-198. For

the reasons already discussed, Bactolac did not itself engage in consumer

transactions. Nor did it sell, lease or license goods to NaturMed; rather, it

manufactured NaturMed’s product pursuant to a contract. Such an arrangement is

not covered by the statutory definition.

Claim XXXII

Plaintiff Norman Skare, a Wisconsin resident, alleges that Bactolac violated

Wisconsin’s Deceptive Trade Practice Act, which prohibits any “‘advertisement,

announcement, statement or representation ... to the public,’ which contains an

‘assertion, representation or statement of fact’ that is ‘untrue, deceptive or

misleading.’” Tietsworth v. Harley-Davidson, Inc., 677 N.W.2d 233, 245 (Wis.

2004) (quoting Wis. Stat. § 100.18(1)). The complaint does not allege that Bactolac

advertised, announced, stated, or represented anything to the public with respect to

ADEG; as with Claim IX, the Court concludes that affixing a label designed by

NaturMed does not qualify.

Claim XXXVI

Claim XXXVI alleges a common-law claim of unjust enrichment on behalf of

all plaintiffs. Specifically, the plaintiffs allege that they “conferred a monetary

benefit on Defendants in the form of monies paid for All Day Energy Greens.” Am.

Compl. ¶ 521. That benefit, however, was conferred only on NaturMed. Any benefit

indirectly received by Bactolac from the sale of ADEG is insufficient to support a

claim of unjust enrichment. See Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000)

(explaining that New York law requires the benefit to “specific and direct”). The

plaintiffs argue that New York law does not necessarily govern the claim, but they

do not cite any cases showing that the rule is different in other states. “The first step

in any choice-of-law analysis is to determine if there is actually a conflict between

the laws of the competing jurisdictions. If there is none, then the law of the forum

state where the action is being tried should apply.” SNS Bank, N.V. v. Citibank, N.A.,

777 N.Y.S.2d 62, 64 (1st Dep’t 2004) (citations omitted).

II. MOTION TO STRIKE PUNITIVE DAMAGES

Several of plaintiffs’ claims seek punitive damages. Bactolac argues that the

plaintiffs have failed to satisfy the standard for such damages under New York

law. But as the plaintiffs point out, their requests for punitive damages are tied to

individual claims, only one of which is governed by New York law.

In any event, the complaint adequately pleads entitlement to punitive

damages under New York law. “Punitive damages are permitted when the

defendant's wrongdoing is not simply intentional but “evince[s] a high degree of

moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal

indifference to civil obligations” Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478,

489 (2007) (quoting Walker v. Sheldon, 10 N.Y.2d 401, 405 (1961)). “There must

be circumstances of aggravation or outrage, such as spite or ‘malice,’ or a

fraudulent or evil motive on the part of the defendant, or such a conscious and

deliberate disregard of the interests of others that the conduct may be called wilful

or wanton.” Prozeralik v. Capital Cities Commc'ns, Inc., 82 N.Y.2d 466, 479

(1993) (quoting Prosser and Keeton on Torts).

Here, the plaintiffs have alleged that Bactolac substituted ingredients

without safety testing them, that it continued to do so after being informed of

reports of illness, and that it covered up its actions. It may prove to be the case, of

course, that Bactolac did nothing wrong, or that it was merely negligent. But the

Court cannot say, based solely on the allegations of the complaint, that punitive

damages are not available.

III. MOTION TO DISMISS NATURMED’S CROSS-CLAIMS

In addition to disputing the plaintiffs’ claims, NaturMed and Bactolac argue

between themselves as to who is responsible for the alleged defect in ADEG.

Bactolac argues that NaturMed’s “untested” formula is to blame, while NaturMed

argues that Bactolac did not comply with its contractual specifications, substituting

inferior ingredients and using unsanitary manufacturing processes.

In 2016, Bactolac sued NaturMed in Arizona for breach of contract for

failure to pay for its deliveries of ADEG. NaturMed answered the complaint and

asserted as an affirmative defense that Bactolac has providing a nonconforming

product. In addition, NaturMed counterclaimed for breach of contract and breach

of express and implied warranties.

NaturMed eventually moved to dismiss its counterclaims without prejudice,

arguing that the recall of ADEG and litigation over ADEG had caused it such

substantial financial harm that it was forced to cease operations and could no

longer afford to pursue its counterclaims. Over Bactolac’s objection, the Arizona

court granted the motion.

Bactolac then moved for summary judgment on its breach of contract claim.

NaturMed, again based on financial constraints, did not oppose the motion. The

Arizona court granted Bactolac summary judgment.

In this case, NaturMed has asserted cross-claims for (1) contractual

indemnity, (2) breach of contract, (3) fraud, (4) breach of express warranty, (5)

breach of implied warranty, and (6) negligence. Bactolac moves to dismiss all but

the indemnity counterclaim. It argues that they are barred by issue preclusion and

claim preclusion.

Issue Preclusion/Collateral Estoppel

“Collateral estoppel or issue preclusion is applicable when the issue or fact

to be litigated was actually litigated in a previous suit, a final judgment was

entered, and the party against whom the doctrine is to be invoked had a full

opportunity to litigate the matter and actually did litigate it, provided such issue or

fact was essential to the prior judgment.” Chaney Bldg. Co. v. City of Tucson, 716

P.2d 28, 30 (1986). Bactolac argues that the Arizona court’s summary judgment

constitutes a final adjudication that its deliveries of ADEG conformed to

NaturMed’s specifications.

Not so. An issue is “actually litigated” when it is “properly raised by the

pleadings or otherwise, and is submitted for determination, and is determined.” Id.

Although NaturMed raised the issue of nonconformity, it did not litigate the issue

because it had gone out of business. In fact, it did not oppose Bactolac’s motion

for summary judgment at all. Thus, the Arizona court’s summary judgment was

effectively a default judgment, and “in the case of a judgment entered by

confession, consent or default, none of the issues is actually litigated.” Id.

Claim Preclusion/Res Judicata

NaturMed’s claim preclusion argument is based on Arizona’s compulsory

counterclaim rule: “A pleading must state as a counterclaim any claim that—at the

time of its service—the pleader has against an opposing party if the claim . . .

arises out of the transaction or occurrence that is the subject matter of the opposing

party’s claim; and . . . does not require adding another party over whom the court

cannot acquire jurisdiction.” Ariz. R. Civ. P. 13(a). “[A] compulsory

counterclaim must be asserted against a plaintiff in order to avoid the application

of res judicata.” Lansford v. Harris, 850 P.2d 126, 132 (Ariz. 1992).

Three of NaturMed’s counterclaims—breach of contract, breach of express

warranty, and breach of implied warranty—were raised as counterclaims in the

Arizona action, but were dismissed without prejudice. “A dismissal without

prejudice . . . is not an adjudication on the merits and does not bar a second action

under the doctrine of claim preclusion.” Airfreight Exp. Ltd v. Evergreen Air Ctr.,

Inc., 158 P.3d 232, 237 (Ariz. Ct. App. 2007).

By contrast, NaturMed did not raise its counterclaims of fraud and

negligence in the Arizona action. It argues that it could not have done so because

those claims had not yet accrued. See Lansford, 850 P.2d at 131 (“[A] claim must

be mature to be compulsory.”). While it is true that a claim accrues only when the

plaintiff “knows or should have known of both the what and who elements of

causation,” Kool Radiators, Inc. v. Evans, 278 P.3d 310, 314 (Ariz. Ct. App. 2012)

(citation and internal quotation marks omitted), it is clear that NaturMed had

sufficient knowledge; its counterclaims in the Arizona action specifically alleged

that Bactolac had failed to blend ADEG “in a commercially reasonable and safe

manner free of negligence and/or misconduct.” Bactolac’s Reply Mem. of Law,

Ex. C.

IV. CONCLUSION

For the foregoing reasons, Bactolac’s motion to dismiss is granted with

respect to claims III, IX, XIX, XXIX, XXXII and XXXVI, and otherwise denied. In

addition, the Court dismisses claims VI, VII, VIII, XIV, XV, XVI, XVIII, XXII,

XIV, XXV, XXVII, XXXIII and XXXIV pursuant to plaintiffs’ withdrawal of those

claims. Accordingly, claims I, V, X, XI, XII, XIII, XVII, XX, XXI, XXIII, XXVI,

XXVIII, XXX, XXXI and XXXV shall proceed.

Bactolac’s motion to strike plaintiffs’ request for punitive damages is denied.

Bactolac’s motion for judgment on the pleadings is granted with respect to

NaturMed’s cross-claims for fraud and negligence, and denied with respect to the

cross-claims for breach of contract, breach of express warranty, and breach of

implied warranty. Those cross-claims, in addition to the cross-claim for contractual

indemnity, shall proceed.

SO ORDERED.

_/S/ Frederic Block____________

FREDERIC BLOCK

Senior United States District Judge

Brooklyn, New York

March 10, 2021