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Direct Enterprises, Inc. v. Sensient Colors LLC

United States District Court, S.D. Indiana, Indianapolis Division

August 3, 2017

DIRECT ENTERPRISES, INC., OLYMPUS SEED TREATMENT FORMULATOR, INC., Plaintiffs,
v.
SENSIENT COLORS LLC, SPECTRA COLORANTS, INC., Defendants. SENSIENT COLORS LLC, Third Party Plaintiff,
v.
SPECTRA COLORANTS, INC., Third Party Defendant.

          ORDER

          HON. JANE MAGNUS-STINSON, CHIEF JUDGE.

         Plaintiffs Direct Enterprises, Inc. (“DEI”) and Olympus Seed Treatment Formulator, Inc. (“Olympus”) (collectively “Plaintiffs”) are companies that specialize in blending and selling treatment mixtures for seeds. Defendant and Third Party Plaintiff Sensient Colors LLC (“Sensient”) sells colorants that are used as additives in seed treatment blends, and Defendant and Third Party Defendant Spectra Colorants, Inc. (“Spectra”) manufactures colorants. This matter arises from a dispute among the parties regarding a batch of allegedly defective colorants that Plaintiffs purchased from Sensient. Plaintiffs filed suit in this Court, alleging various causes of action against Sensient and Spectra. Following their initial complaint, Plaintiffs filed several amended complaints over the next eighteen months, with the operative Third Amended Complaint filed in February 2017. [Filing No. 95.] Sensient and Spectra have filed Motions to Dismiss the Third Amended Complaint, arguing that Plaintiffs have failed to state a claim upon which relief may be granted. [Filing No. 96; Filing No. 100.] For the reasons below, the Court denies Sensient's Motion to Dismiss and grants Spectra's Motion to Dismiss.

         I.

         Legal Standard

         Federal Rule of Civil Procedure 8(a)(2) “requires only ‘a short and plain statement of the claim showing that the pleader is entitled to relief.'” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (quoting Fed. R. Civ. Pro. 8(a)(2)). “Specific facts are not necessary, the statement need only ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Erickson, 551 U.S. at 93 (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007)).

         A motion to dismiss asks whether the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). In reviewing the sufficiency of a complaint, the Court must accept all well-pled facts as true and draw all permissible inferences in favor of the plaintiff. See Active Disposal, Inc. v. City of Darien, 635 F.3d 883, 886 (7th Cir. 2011). The Court will not accept legal conclusions or conclusory allegations as sufficient to state a claim for relief. See McCauley v. City of Chicago, 671 F.3d 611, 617 (7th Cir. 2011). Factual allegations must plausibly state an entitlement to relief “to a degree that rises above the speculative level.” Munson v. Gaetz, 673 F.3d 630, 633 (7th Cir. 2012). This plausibility determination is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id.

         II.

         Background

         DEI is a marketer and distributor of farming inputs and agricultural products, including agricultural seed treatments. [Filing No. 95 at 2.] DEI formulates and sells seed treatments for application to agricultural seed such as corn, wheat, and soybeans. [Filing No. 95 at 2.] The applicable federal regulatory regime requires that seeds that are treated with compounds that are poisonous to humans and animals be colored, so persons handling the seed are aware of the nature of the treatment. [Filing No. 95 at 3.] Several of DEI's seed treatments contain pesticides and fungicides, including some compounds that have a degree of toxicity to humans and animals. [Filing No. 95 at 3.]

         Sensient is a manufacturer and supplier of colorants, which are promoted by Sensient for use in food, pharmaceutical, and industrial applications. [Filing No. 95 at 2.] In early December 2011, Sensient promoted the use of its colorants at a trade show attended by Dennis Tauchen, one of the principals of DEI. [Filing No. 95 at 3.] Keith Brewer, a sales account manager for Sensient, promoted Sensient's colorants for the coloring of chemically treated seeds. [Filing No. 95 at 3.] Brewer “touted to Tauchen Sensient's experience in the seed industry, and the superiority of its colorants for use in agricultural seed applications.” [Filing No. 95 at 3.] After the trade show, Brewer continued to solicit DEI for its colorant business. [Filing No. 95 at 3.] Brewer represented to Don Bradley, a DEI consultant, that Sensient manufactured colorants using only EPA-approved ingredients, and that Sensient produced a colorant that gives a pearlescent effect to treated seed. [Filing No. 95 at 3.]

         As a result of these solicitations, Brewer, Tauchen, and Bradley began emailing one another regarding potential purchases of colorant, polymers, and custom colorants. [Filing No. 95 at 4.] Brewer represented that Sensient manufactured a line of standard colorants under the name “Sensi-Coat” and a premium colorant that created a pearlescent effect. [Filing No. 95 at 4.] In December 2011, DEI emailed Brewer descriptions of its basic seed treatment blends and how Sensient's colorants would be used in the blends. [Filing No. 95 at 4.] On or around December 20, 2011, Brewer emailed DEI copies of its product labels, data sheets, and material safety data sheets for the Sensi-Coat red colorant. [Filing No. 95 at 4.] Around the same date, Brewer emailed the following representations about Sensient's pearlescent red colorant, “Sensi-Coat Red Pearlescent”: (1) “Sensi Coat Red Pearlescent (SCP) uses the same pigment as [Sensi Coat Red]”; (2) “Usage rates are the same for [Sensi-Coat Red and Sensi-Coat Red Pearlescent].”

         The parties continued to communicate regarding price quotes, products, and a nondisclosure agreement. [Filing No. 95 at 5.] On or around January 31, 2012, Brewer traveled to Indiana to meet with DEI. [Filing No. 95 at 5.] During that visit, Brewer represented that Sensient developed and tested its colorants and polymers in Sensient's lab. [Filing No. 95 at 5.] In January and February 2012, Sensient provided DEI with small samples of Sensi-Coat Red, Sensi-Coat Blue, Sensi-Coat Green, and Sensi-Coat Red Pearl for evaluation and small-scale seed treatment trials. [Filing No. 95 at 6.] Using those samples, DEI made small batches of seed treatment blends to evaluate compatibility with the blend components, the appearance of the colorant when applied to seed, and whether the colorant would have any adverse effect on germination. [Filing No. 95 at 6.] Tauchen and Bradley relayed the results of those sample evaluations to Brewer, and Brewer made several follow-up visits to DEI's facilities to observe the seed treatment operation and to personally view the evaluations conducted by DEI. [Filing No. 95 at 6.] The only instructions that Sensient provided during the evaluation of the colorants consisted of usage rates. [Filing No. 95 at 7.]

         In February 2012, the principals of DEI formed a new company, Olympus, to become the seed treatment division of DEI and to establish an outside market for the custom seed blends. [Filing No. 95 at 6.] Sensient, via Brewer, was informed about the creation of Olympus and was informed that Olympus would make the blends and sell seed treatments to DEI and DEI's customers. [Filing No. 95 at 7.] Brewer regarded DEI and Olympus as a single customer, with the express understanding that DEI would be the primary beneficiary of treatment blends made by Olympus. [Filing No. 95 at 7.]

         Based on the various written and oral representations from Brewer, as well as DEI's and Olympus' review of information publicly available about Sensient, DEI and Olympus decided to purchase Sensient's colorants for use in their seed treatment blends. [Filing No. 95 at 7-8.] Tauchen emailed Brewer Olympus' first purchase order on or about May 27, 2012. [Filing No. 95 at 8.] Brewer emailed his receipt and acceptance of the order within a few days, and he did not communicate any additional terms. [Filing No. 95 at 8.] In that email, Brewer indicated that Sensient would produce the colorant for Olympus and DEI. [Filing No. 95 at 8.] Plaintiffs' understanding is that Sensient filled this order with Sensi-Coat Red. [Filing No. 95 at 8.] Following this initial order, Brewer, Tauchen, and Bradley continued to communicate by email regarding future orders of Sensient's colorants, polymers, and other products. [Filing No. 95 at 8.] These discussions formed the basis of Olympus' future purchase orders. [Filing No. 95 at 8-9.] From July 2012 through November 2013, Tauchen emailed four more purchase orders to Brewer, which Brewer accepted. [Filing No. 95 at 9.]

         In the fall of 2012, Brewer inquired again about Plaintiffs' continued interest in Sensi-Coat Red Pearl, and offered to provide an updated price quote. [Filing No. 95 at 9.] Tauchen responded that he would be willing to order red, green, and blue in the pearlescent format, depending on Sensient's pricing. [Filing No. 95 at 10.] Thereafter, Brewer emailed an updated price for the pearlescent colors and sent samples of Sensi-Coat Blue Pearl and Sensi-Coat Green Pearl for evaluation. [Filing No. 95 at 10.] Brewer represented that those colors should mimic Sensi-Coat Red Pearl. [Filing No. 95 at 10.] On October 8, 2012, Brewer emailed Tauchen to request that Olympus' Purchase Order #114 be amended to switch from Sensi-Coat Red to Sensi-Coat Red Pearl at a higher price, and Tauchen agreed. [Filing No. 95 at 10.] Brewer also switched the other colorants remaining in that purchase order (blue and green) from standard colorants to Sensi-Coat Green Pearl and Sensi-Coat Blue Pearl. [Filing No. 95 at 10.]

         In November 2012, Tauchen emailed Brewer Purchase Order #139 requesting Sensi-Coat Red Pearl. [Filing No. 95 at 10.] In December 2012, Sensient shipped red, blue, and green pearlescent colorants to complete the remaining portion of Purchase Order #114 and to fill Purchase Order #139. [Filing No. 95 at 10.] Olympus used those pearlescent colorants to make seed treatment blends for the upcoming soybean season. [Filing No. 95 at 10.] Olympus then sold those treatment blends to a direct customer and to DEI, which in turn sold those blends to its customers. [Filing No. 95 at 10.] Plaintiffs' customers began to report that the drums containing the blends had a thick sludge on the bottom, and that the sludge was plugging up their treating equipment. [Filing No. 95 at 11.] In many instances, the seed treatments became so thick that they could not be used to treat seed. [Filing No. 95 at 11.] Some customers also reported that drums were swelling with an accumulation of gases. [Filing No. 95 at 11.] The majority of customer complaints concerned treatments containing Sensient's red colorant, although a small number concerned the blue and green colorants. [Filing No. 95 at 11.]

         DEI and Olympus promptly investigated these complaints, and sent teams to try to re-work the treatments to make them usable. [Filing No. 95 at 11.] While investigating, Plaintiffs came to believe that Sensient's colorants were causing the problems observed in the treatments, and they promptly notified Sensient of the issues. [Filing No. 95 at 11.] Plaintiffs offered numerous samples of the problematic mixtures to Sensient for investigation, and they also sent Sensient samples for testing. [Filing No. 95 at 11.] Sensient was informed that DEI and Olympus were incurring significant losses due to seed treatment blends being destroyed and becoming unusable by customers. [Filing No. 95 at 11.] Bradley notified Brewer that DEI and Olympus would not be able to continue using Sensient's pearlescent colorants due to their instability, tendency to settle, and high ammonia content. [Filing No. 95 at 11.] Bradley requested that Sensient take back the unopened inventory of colorants, consisting of pre-packaged 2.5-gallon jugs of red, green, and blue pearlescent colorants. [Filing No. 95 at 12.]

         As these communications were occurring, Plaintiffs did not know that Sensient was not the manufacturer of any of the products that it sold to Plaintiffs. [Filing No. 95 at 12.] Spectra was the actual manufacturer. [Filing No. 95 at 12.] On or around October 1, 2013, Gary Wulf, the vice-president of Spectra, admitted to Sensient that it made a mistake in producing the red pearl colorant. [Filing No. 95 at 12.] Wulf stated that instead of 27 pounds of ammonia, Spectra added 270 pounds of ammonia to red pearl lot number 22121010. [Filing No. 95 at 12-13.] On or around October 23, 2013, Brewer emailed Plaintiffs that Sensient had identified a “crucial problem” and admitted that one lot of Sensi-Coat Red Pearl was overloaded by a factor of ten with ammonium hydroxide. [Filing No. 95 at 12.] Brewer assured Plaintiffs that Sensient would make them whole and repair the problem. [Filing No. 95 at 12.]

         In the following months, Plaintiffs provided information regarding the destroyed treatments and the financial losses they accrued. [Filing No. 95 at 12.] Sensient ultimately informed Plaintiffs by letter that it was not the manufacturer or developer of the colorants on April 29, 2014. [Filing No. 95 at 13.] Sensient stated that “Sensient did not manufacture the colorant provided to your client, but rather obtained this material directly from or [sic] supplier, Spectra Colorants, Inc., and resold it to DEI under a Sensient label. In spite of this deviation, the colorant continued to meet all specifications and [DEI] accepted and proceeded to use the colorant in its seed treatment blends.” [Filing No. 95 at 13.] Plaintiffs understood this response to be a rejection of their previous efforts to substantiate their losses, and communication between the parties ended. [Filing No. 95 at 13.]

         Plaintiffs filed their initial Complaint against Sensient in this Court on August 24, 2015, [Filing No. 1], followed by Amended and Second Amended Complaints, [Filing No. 9; Filing No. 23]. Plaintiffs filed the operative Third Amended Complaint, also naming Spectra as a defendant, on February 18, 2017.[1] [Filing No. 95.] Plaintiffs allege claims for fraud and constructive fraud; breach of contract; breach of express warranty; breach of the implied warranty of merchantability; breach of the implied warranty of fitness for a particular purpose; and violation of the Indiana Products Liability Act (“IPLA”). [Filing No. 95 at 21.] Presently pending before the Court are Motions to Dismiss filed by Sensient, [Filing No. 96] and Spectra, [Filing No. 100]. Those motions are now ripe for the Court's review.

         III.

         Discussion A. Sensient's Motion to Dismiss

         Sensient moves to dismiss four of Plaintiffs' six claims-fraud and constructive fraud; breach of contract; breach of express warranty; and violation of the IPLA. Sensient also moves to dismiss DEI as a plaintiff. The Court considers each claim in turn.

         1. Fraud and Constructive Fraud

         Sensient argues that Plaintiffs fail to plead all of the required elements to establish fraud, particularly under the heightened pleading standard of Federal Rule of Civil Procedure 9(b). [Filing No. 97 at 10.] Specifically, Sensient contends that Plaintiffs fail to allege scienter-that Sensient made a representation with knowledge or reckless ignorance of the statement's falsity. [Filing No. 97 at 10.] As for constructive fraud, Sensient argues that Plaintiffs have not adequately pleaded the first required element-that Sensient had a duty to disclose certain material information. [Filing No. 97.] Plaintiffs respond that they have adequately pleaded all of the required elements to maintain a claim for fraud and constructive fraud. [Filing No. 105 at 9-11.]

         Under Indiana law, fraud consists of six elements: “(1) a material misrepresentation of past or existing fact which (2) was untrue, (3) was made with knowledge of or in reckless ignorance of its falsity, (4) was made with the intent to deceive, (5) was rightfully relied upon by the complaining party, and (6) which proximately caused the injury or damage complained of.” Kesling v. Hubler Nissan, Inc., 997 N.E.2d 327, 335 (Ind. 2013). “Fraud may be proven by circumstantial evidence, provided there are facts from which the existence of all of the elements can be reasonably inferred.” Wright v. Pennamped, 657 N.E.2d 1223, 1230 (Ind.Ct.App. 1995), decision clarified on denial of reh'g, 664 N.E.2d 394 (Ind.Ct.App. 1996).

         Sensient contends that Plaintiffs' Amended Complaint “does not address scienter with respect to the ten allegedly false representations” identified. [Filing No. 97 at 11.] Sensient argues that “[a]t most, the allegations suggest Plaintiffs were simply (and unfortunately) confused by the different attributions of the Pearl and non-Pearl.” [Filing No. 97 at 11.] This characterization of Plaintiffs' Amended Complaint, however, ignores a host of allegations regarding the fraud claim. For example, Plaintiffs allege that Sensient made representations that it developed and manufactured the colorants and polymers sold to Plaintiffs, when in fact Spectra was the actual manufacturer. [Filing No. 95 at 4-7; Filing No. 95 at 13.] While Plaintiffs may not specifically allege that Sensient had scienter as to Spectra's role, the Court may reasonably infer that Sensient knew who manufactured the products it sold, given the relationship between Spectra and Sensient. Accordingly, Plaintiffs have sufficiently pleaded their fraud claim.

         As to constructive fraud, Sensient argues that it “did not have the duty to disclose and explain to Plaintiffs the minutia identified as misrepresentations.” [Filing No. 97 at 11.] Under Indiana law, constructive fraud consists of: (1) a duty existing by virtue of the relationship between the parties; (2) representations or omissions made in violation of that duty; (3) reliance thereon by the complaining party; (4) injury to the complaining party as a proximate result thereof; and (5) the gaining of an advantage by the party to be charged at the expense of the complaining party. Wells v. Stone City Bank, 691 N.E.2d 1246, 1250-51 (Ind.Ct.App. 1998). Regarding the first element, the duty owed between the parties, constructive fraud may arise when the relationship between the parties is one of buyer and seller. Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind.Ct.App. 1994) (“where a seller makes unqualified statements in order to induce another to make a purchase, the buyer relies on those statements, and the seller has professed knowledge of the truth of the statements, a constructive fraud occurs”). “The law recognizes that in a buyer-seller relationship one party may be in the unique position of knowledge not possessed by the other and may thereby enjoy a position of superiority over the other. The relationship is therefore one which invokes the duty of good faith and fair dealing.” Id.

         Sensient challenges the first required element, arguing that no duty was created, because Brewer, “a mere salesman, ” did not have skills or expertise regarding seed treatments or pearlescent colorants that were “superior to” those of Plaintiffs, who were “actually in the seed treatment business.” [Filing No. 97 at 12.] This argument fails. Brewer need not have special skills or expertise for a duty to be imposed; it is sufficient that he allegedly possessed information not known to Plaintiffs-i.e., the actual manufacturer of the products. See Mullen, 643 N.E.2d at 401. Taking as true the Third Amended Complaint's allegations, Sensient alone had knowledge of who was actually developing and manufacturing its products. That put Sensient in a superior position to Plaintiffs, who received only Sensient's representations that it manufactured the subject products. This is sufficient to maintain the first element of a constructive fraud claim.

         Sensient argues in the alternative that the Court should dismiss any fraud or constructive fraud claims based on statements that are “expressions of opinion.” [Filing No. 97 at 13.] Sensient takes issue with the following statements:

• “[T]he colorants and polymers sold by Sensient were used ‘extensively' in the seed industry”;
• “[T]he colorants would provide ‘better' coating properties than dyes”;
• “[T]he components of the colorants were ‘widely' used”;
• “[T]he Pearl was a ‘premium' product that would perform ‘very well'”;
• “Sensient was ‘capable' of providing tech support for its colorants”;
• “[T]he polymers sold by Sensient would ‘ensure' the active ingredients would stay on the seeds.” [Filing No. 97 at 13.]

         Under Indiana law, statements of opinion generally may not provide the basis for a fraud claim. Kesling, 997 N.E.2d at 336 (“Mere ‘puffing' is a statement of opinion, not a representation of fact, and thus cannot be the basis of deception or fraud claims.”); see also Reed v. Reid, 980 N.E.2d 277, 292 (Ind. 2012). Most of the statements identified by Sensient, however, are not statements of opinion, but rather statements of fact. The following four statements make factual representations:

• “[T]he colorants and polymers sold by Sensient were used ‘extensively' in the ...

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