Applying the economic loss rule, the Dallas Court of Appeals has reversed a $1.5 million negligence judgment for the plaintiff in an action for tort and contract damages.
House of Raeford Farms, Inc., Ozark Mountain Poultry, Inc., and Fieldale Farms Corporation v. SOMMA Food Group, LLC (No. 05-22-01231-CV; February 2, 2024) arose from a contract between SOMMA, who sold chicken tenders to the New York City Department of Education, and two poultry suppliers, Raeford and Ozark. In 2016, the Department began receiving complaints that the chicken tenders served to students contained bone shards and pieces of plastic. SOMMA informed Raeford of the complaints, which agreed to provide x-ray equipment to its own suppliers if SOMMA would pay an additional charge. SOMMA agreed and ordered nine additional loads of chicken over the next few weeks. However, it didn’t pay for them and soon switched suppliers from Raeford to a non-party vendor, OK Foods. Unfortunately, consumers likewise found foreign objects in chicken supplied by OK, which led to an USDA recall in 2017. New York City subsequently pulled the plug on all SOMMA products.
In January 2017 SOMMA sued Raeford, asserting breach of contract, negligence, and fraud. Raeford countersued for breach of contract and cross-claimed Ozark and Fieldale. SOMMA then added claims against them as well. A jury found that both SOMMA and Raeford breached the contract between them and awarded about $2.5 million to SOMMA and $500,000 to Raeford. The trial court entered judgment on the SOMMA award but disregarded the verdict awarding Raeford contract damages. The jury found further that SOMMA suffered about $7.6 million in damages from Raeford’s negligence and that Raeford was entitled to about $1 million from Ozard and Fieldale on its contract claims. The trial court awarded $736,000 in negligence damages to SOMMA against Ozark and Fieldale (based on the jury’s allocation of fault) but awarded no negligence damages against Raeford. Finally, the trial court awarded SOMMA attorney’s fees on its contract claims. Each party filed appeals and cross-appeals.
As to SOMMA’s negligence claim, the court of appeals reversed. Fieldale asserted that the economic loss role precluded the claim. As SCOTX has held, “in unintentional torts (e.g., negligence), the common law has long restricted recovery of purely economic damages unaccompanied by injury to the plaintiff or his property—a doctrine . . . referred to as the economic loss rule” (quoting LAN/STV v. Martin K. Eby Const. Co., Inc., 435 S.W.3d 234, 235 (Tex. 2014)). The court noted that the economic loss rule derives from product liability law, where it precludes the recovery of economic damages from the loss of the product itself. “The rule,” the court stated, “has two primary rationales: (1) because purely economic harm is not self-limiting like physical injury is, allowing its recovery in tort could lead to indeterminate and disproportionate liability that discourages economic activity; and (2) the risks of economic losses are well suited to allocation by contract, where parties familiar with their own economic needs may protect themselves through insurance or indemnity agreements and price their transactions accordingly” (citations omitted).
In this case SOMMA sought purely economic damages in its negligence claim, as testified by SOMMA’s witness, who calculated the amount of loss profits arising from the defective chicken. The court determined that these are precisely the type of tort damages precluded by the economic loss rule. SOMMA could easily have protected itself by contract (in addition to its UCC remedies) if had chosen to do so. SOMMA’s effort to base its damages on Fieldale’s violation of federal safety regulations likewise failed because SOMMA cannot assert a private cause of action for those violations. The court thus reversed the trial court’s judgment for SOMMA on its negligence claims against Fieldale and Ozark.
The court went on to reverse the trial court’s judgment disregarding the jury’s finding that SOMMA breached its contract with Raeford. The court held that since SOMMA knew of Raeford’s material breach but continued to make orders for which it did not pay, it failed to establish its material breach defense. As to the attorney’s fee awards, the court remanded the issue of Raeford’s attorney’s fees, which the trial court did not award, for a determination of the amount of reasonable and necessary fees owed to Raeford’s attorneys on its breach of contract claim. It also upheld the trial court’s fee award to SOMMA on its contract claim. Finally, the court disposed of Raeford’s appeal of the trial court’s refusal to grant a bill of review in the case based on SOMMA’s alleged bribery of a New York City official to help it obtain the chicken contract. The court held that SOMMA’s alleged conduct had nothing to do with its contracts with the suppliers.
This is an interesting case from many angles. (I learned, for example, that a contract promising “boneless” chicken does not mean that the chicken has to be “100%” boneless. Based on my new knowledge, I will certainly proceed with caution when eating “boneless” chicken in the future.) From our standpoint, we appreciate the court of appeals’ thorough analysis of the economic loss rule and its application in this case. This is a solid opinion all around.
