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General Foods Corp. v. Valley Lea Dairies Inc.

August 30, 1985

GENERAL FOODS CORPORATION, PLAINTIFF-APPELLANT,
v.
VALLEY LEA DAIRIES, INC. AND LYONS CREAMERY COOPERATIVE ASSOCIATION, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. No.S80-0354--Allen Sharp, Chief Judge.

Author: Campbell

Before BAUER, Circuit judge, EASTERBROOK, Circuit Judge, and CAMPBELL, Senior District Judge.*fn*

CAMPBELL, Senior District Judge.

This case centers around a commercial transaction involving three parties: plaintiff, General Foods Corporation (General Foods), and co-defendants, Valley Lea Dairies, Inc. (Valley Lea) and Lyons Creamery Cooperative Association (Lyons). On appeal the case primarily addresses the issue of when liability for defects in a product can shift from seller to buyer or, more specifically, when an implied warranty for merchantability attached to a seller's product can yield to the doctrine of incurred risk due to conduct on the part of the buyer, shifting liability from seller to buyer.

On November 8, 1978 General Foods purchased 40,000 pounds of roller whole dry milk from Valley Lea and Lyons. Valley Lea is a cooperative dairy association located in South Bend, Indiana. Lyons, now defunct, was a member of the Valley Lea Cooperative. Lyons produced the roller whole dry milk purchased by General Foods (through Valley Lea) and delivered the product to General Foods by truck on December 18, 1978. This shipment was labeled "R33250" and divided into nine "lots" containing 25-50 bags per lot. General Foods has an expressly stated policy which is distributes to its suppliers of roller whole dried milk. It is entitled "Supply of Microbiologically Sensitive Food Ingredients." The policy states the vendor must certify its product in manufactured under appropriate sanitary conditions in conformance with federal regulations. With milk-based products such certification is accomplished by the conducting of certain tests which ascertain levels of mold, yeast, streptococcus, salmonella and other microbiological "attributes" associates with the product. Prior to shipment Valley Lea tasted its product according to General Foods' policy specifications. The tests proved negative. However, General Foods' stated policy also reserves the right to perform its own tests upon receipt of such products and accept or reject the product based on its own test results:

ARTICLE II--RECORDS

Analyses made by the vendor shall be forwarded in advance of/or with the shipments to the recipient plant Quality Assurance and Quality Control Managers. A minimum of three samples per lot is required for Salmonella. General Foods will sample at a rate higher then [sic] the minimum and accept or reject based on these results. General Foods Appendix p. 82 (emphasis added).

General Foods did its own testing of the co-defendants' shipment #R33250 several days after its receipt. One of the nine lots proved positive for salmonella, a potentially lethal bacterial contaminant found in milk products. General Foods rejected the contaminated lot.

Having found one contaminated lot in shipment #R33250 General Foods had an internal policy decision to make. The shipment had become suspect. General Foods decided the remaining lots would be tested for contaminants at heightened levels, the results of which would provide for a 95% "confidence level" (meaning less than a 5% chance of defect). General Foods tested the remaining samples at this heightened level and the tests proved negative. General Foods decided to release the remaining lots into its milk chocolate production channels. General Foods claims the following factors induced it to release the remaining lots: Lyons' previously unblemished history, no suggestion of possible contamination by Valley lea, Valley Lea's approval of General Foods' testing plan, customer needs and the 95% confidence level in the final tasting of the product.

After milk chocolate had been produced from the roller whole dried milk General Foods took samples of the chocolate for testing. Before the test results were available General Foods shipped the chocolate to two of its customers, Elmer Candy and Frankford Candy. Several days later, General Foods discovered salmonella contamination in the samples from the chocolate it had shipped. As a result of the Elmer and Frankford Candy companies incurred hundreds of thousands of dollars worth of losses. Importantly, none of the contaminated chocolate reached the retail level.

General Foods settled its affairs with the two candy companies out of court. In July of 1981 General Foods brought suit in the United States District Court for the Northern District of Indiana against Valley Lea and Lyons. The allegations from that suit brought on appeal are breach of express and implied warranties. At the district court level General Foods sought to be indemnified for its settlement agreements with Elmer Candy (for $300,000) and with Frankford Candy (for $208,000). General Foods also sought recovery of its own direct damages it calculated to be in the amount of $688,391.13, plus reasonable attorneys' fees. A jury trial was held and a verdict rendered for co-defendants, Valley Lea and Lyons. The jury believed General Foods incurred the risk of loss by using the suspect shipment rather than rejecting the shipment, as it was entitled to do. General Foods received nothing and was directed to cover the defense costs of the co-defendants.

On appeal General Foods claims several jury instructions given by Judge Allen Sharp were erroneous and reversible error. Primarily, General Foods claims Judge Sharp's jury instructions concerning the doctrine of incurred risk were erroneous. General Foods claims according to Indiana caselaw and trial court erred on instructing when the incurred risk defense should be attached. General Foods claims if the appropriate law were applied in this case, co-defendants' implied warranty of merchantability attached to its product would have allowed General Foods to recoup its losses. General Foods has also advanced several additional arguments which will be discussed below as they were raised. General Foods has asked for a new trial on appeal. For the reasons set forth below, its request is denied and the order of the district court is affirmed.

General Foods claims jury instruction No. 27 (see Appendix No. 1) set forth inaccurate legal standards on the doctrine of incurred risk which confused the jury and prejudiced its case, causing reversible error. The lead case on the doctrine of incurred risk in Indiana cited by all parties is Kroger Co. v. Haun, 177 Ind. App. 403, 379 N.E.2d 1004 (1978). Several principles are established in the Kroger case:

"The doctrine of incurred risk is based upon the proposition that one incurs all the ordinary and usual risks of an act upon which he voluntarily enters, so long as those risks are known and understood by him...

Incurred risk demands a subjective analysis with inquiry into the particular actor's knowledge and voluntary acceptance of the risk. Contributory negligence contemplates an objective standard for the determination whether a reasonable man would have acted under similar circumstances.

Incurred risk is concerned with the perception and voluntariness of a risk and is blind as to the reasonableness of risk acceptance.

Incurred risk involves a mental state of 'venturousness' while contributory negligence... describes conduct which is 'careless'." Id. 379 U.S. at 1008.

We believe jury instruction No. 27 accurately set forth the current Indiana law on the incurred risk doctrine. Indeed, the jury instruction employs much of the same language used in the Kroger case in describing the elements of the incurred risk doctrine. General Foods claims the failure of the court to define the word "risk" confused the jury and "supports the notion that general knowledge of a possible risk is sufficient to support the defense of incurred risk." Yet General Foods advances no legal authority which supports its conclusion that defining the word "risk" is necessary for a fair jury instruction.

General Foods further claims the first paragraph of instruction No. 27 amounted to a mandatory instruction. General Foods again believes the paragraph forces a jury to conclude if General Foods merely knew of a risk, the defense of incurred risk was proved. We find nothing in the language of paragraph one which substantiates such an argument. The language instructs the jury "should you find" General Foods knew of the risk of contamination, General Foods "may" have incurred the risk of any damage it suffered. General Foods' assertion that this language directs a verdict for Valley Lea because there was always a risk of contamination is unpersuasive. The first paragraph of the instruction leads a jury to conclude the incurred risk doctrine is capable of being invoked in this case, not necessarily to be invoked. General Foods claims the court erred when it stated in its instruction the defense of incurred risk is available to Valley Lea if General Foods knew of a danger and proceeded unreasonably to use the product. General Foods claims its decision did not have to be unreasonable. General Foods correctly states from Kroger incurred risk "is blind as to the reasonableness of risk acceptance." Yet with this in mind the district court's statement General Foods had to proceed unreasonably in encountering the known risk could only have helped General Foods and placed a greater burden of proof on Valley Lea. Hence no harmful, prejudicial error occurred to General Foods when the court required the jury to find General Foods' conduct unreasonable before the defense of incurred risk could be applied to its actions.

General Foods claims it did not knowingly and voluntarily face a specific (actual) risk and therefore giving the jury an incurred risk instruction was inappropriate. General Foods cites Power v. Brodie, 460 N.E.2d 1241 (Ind.App. 1984), which states the incurred risk doctrine is a defense for Valley Lea if General Foods had: (1) more than a general awareness of a potential mishap; (2) actual knowledge and voluntary acceptance of the risk; and (3) consciously, deliberately and intentionally embarked upon a course of conduct with knowledge of the circumstances and a mental state of venturousness. See Power, 460 N.E.2d at 1243. We believe the jury could have found General Foods to have had the mental state described in Power, supra and applied the incurred risk doctrine in this case as a result. Looking at the first prong of the Power criteria, General Foods had more than a general awareness of a potential mishap. When part of the shipment at issue was found to be contaminated with salmonella General Foods had the right to reject the entire shipment at a point before it incurred losses. Yet General Foods never attempted to return the remainder of the suspect shipment and it was General Foods' own decision that the remainder of the shipment could be used after being cleared by further in-house testing. As for the second prong of the Power criteria, General Foods had actual knowledge and voluntarily accepted the risk. It is true, as General Foods asserts, it did not have actual knowledge of a defect in the remainder of the shipment. However, this misses the point. the key point is that General Foods had actual knowledge the product could be contaminated, having already found one bad lot. If General Foods had to have knowledge of a defect for the doctrine of incurred risk to be implied, the doctrine could never be applied for there would be no risk involved.

General Foods decided to use a test which would allow it to be 95% sure the remainder of the product was not contaminated. General Foods depended on the test and consciously and voluntarily decided to incur the small 5% risk involved in a shipment already suspect. If the in-house tests General Foods decided to use had only a 65% or 75% accuracy level perhaps General Foods would have asked Valley Lea for a refund, having already found one contaminated lot. Instead, General Foods depended on a test it knew was not 100% certain. General Foods decided the 95% test was good enough. It is--95% of the time. Finally, it is not incomprehensible a jury would find General Foods' decision to release the finished milk chocolate to the candy companies before further test results on the product were available a good example of the conduct described in the third prong of the Power case--conscious, intentional embarkation upon a course of conduct with knowledge of the circumstances and a mental state of venturousness. Risk of salmonella contamination in roller whole dried milk is ever present. General Foods knew the shipment it was dealing with was particularly suspect. In choosing not to wait a few days for the second test results to arrive it adopted a mental state of venturousness and incurred risk. Surely a jury could apply the incurred risk doctrine to General Foods' actions according to the Power criteria.

General Foods believes that because the risk was not probable, it was too insignificant to be an incurred risk; that the incurred risk doctrine can only be employed when there is a probability of harm, not a mere possibility of harm. The triggering factor in employing the incurred risk doctrine is that a risk was known, not what chance there is of the risk being realized. The Kroger case does not speak in terms of probabilities. The analysis is not whether there was a 51% chance or a 5% chance the risk would be realized but merely whether there was any risk knowingly understood and voluntarily entered into by the actor. It is the existence of the mental state of the actor that counts, not the probability of the risk being realized. Once the existence of the risk is understood by the actor, whether the doctrine of incurred risk is applied to the actor's subsequent conduct is a question of fact for ...


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