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Dickinson Frozen Foods, Inc. v. FPS Food Process Solutions Corp.

United States District Court, D. Idaho

May 21, 2019

DICKINSON FROZEN FOODS, INC., Plaintiff/Counterdefendant,


          David C. Nye Chief U.S. District Court.


         Before the Court is a Motion for Sanctions for Spoliation of Evidence (Dkt. 39) filed by Defendant/Counterclaimant FPS Food Process Solutions Corporation. Having reviewed the record, the Court finds that the facts and legal argument are adequately presented in the briefs. Accordingly, in the interest of avoiding further delay, and because the Court finds the decisional process would not be significantly aided by oral argument, the Court decides the Motion on the record without oral argument. Dist. Idaho Loc. Civ. R. 7.1(d)(2)(ii). For the reasons set forth below, the Court GRANTS the Motion.


         Plaintiff/Counterclaimant Dickinson Frozen Foods, Inc. (“Dickinson”) owns and operates a vegetable processing facility located in Sugar City, Idaho. Defendant/Counterclaimant FPS Food Process Solutions Corporation (“FPS”) designs, manufactures, and sells large industrial tunnel freezers internationally to the food processing industry. This case arises out of the purchase and sale of an industrial freezer built by FPS for Dickinson.

         FPS freezers are custom designed and created to meet a customer's specific needs. The units are approximately the size of a semi-truck trailer, or even larger, and can cost millions of dollars. Food products enter FPS freezers on one end, and, while traveling through a series of conveyor belts, are blast frozen and ready for packaging by the time they exit the freezer. Unlike a home freezer, industrial tunnel freezers do not have an independent ability to cool or freeze products. Instead, the freezers are supported by a refrigeration infrastructure fueled by a cooling liquid.[1] Refrigeration infrastructures are complex and can take up entire buildings, or even several buildings. In the food processing industry, customers seeking to purchase an industrial tunnel freezer are responsible for designing and installing a sufficiently robust refrigeration infrastructure to support the freezer.

         In its collaboration with customers to design a freezer, a customer informs FPS of the intended food product, the required production amount, and the temperature desired after freezing. Using this information, FPS then calculates the cooling output the customer's refrigeration infrastructure will need to produce to support the custom designed freezer and meet the customer's desired outcome.

         On March 11, 2016, Dickinson and FPS entered a written contract (hereinafter the “Agreement”) for Dickinson's purchase of an FPS freezer. Dickinson agreed to pay FPS $926, 000 in exchange for an FPS model MT5-6 IQF Tunnel Freezer (hereinafter the “FPS Freezer”). Under the Agreement, FPS promised to build Dickinson a freezer that would freeze 8, 000 pounds of diced and shredded potatoes an hour to 0°F. FPS represented the FPS Freezer would fully perform with a refrigeration infrastructure that provided 210 tons of refrigerant delivering -40°F of cooling “at the coil.” This meant Dickinson's refrigeration infrastructure needed to be capable of delivering -40°F to the refrigeration coil of the FPS Freezer. Dickinson hired Kemper Northwest, Inc. (“Kemper”) to design and install the refrigeration infrastructure (hereinafter the “Refrigeration System”).

         On July 23, 2016, FPS delivered the FPS Freezer to Dickinson's Sugar City facility. FPS hired third-party contractor Cold Steel Contractors, LLC (“Cold Steel”) to assist it with installation. The FPS Freezer arrived in two halves, each about 28 feet long, 14 feet wide, and 14 feet high. After portions of Dickinson's building were demolished to make room for the FPS Freezer, the two halves were loaded by crane onto the frame assembly and then welded together by Cold Steel.

         Dickinson alleges the FPS Freezer failed to meet contract specifications as soon as it started operating. For instance, instead of producing 8, 000 pounds of frozen potatoes an hour, the FPS Freezer produced a maximum of 4, 000 pounds per hour. Dickinson also claims the FPS Freezer could only run for 6 hours or less at a time (when it was intended to run for 20-22 hours per day) and suffered from excessive ice and frost buildup. Dickinson immediately notified FPS of the performance issues. For the next year, FPS sent numerous field service technicians to the Sugar City facility to attempt to resolve the issues.

         During the course of these visits, the parties disagreed over whether the FPS Freezer was incapable of meeting contract specifications, or whether Dickinson's Refrigeration System was instead inadequate. FPS contends its technicians repeatedly alerted Dickinson that the Refrigeration System appeared incapable of delivering -40°F at the coil, and that Dickinson's employees were harming the FPS Freezer's efficiency by spraying hot water on the unit to clean it, by constantly opening the door to look inside, and by using the wrong oil to run the FPS Freezer. FPS claims Dickinson largely dismissed these warnings. Dickinson maintains it made each of FPS' suggested modifications to its Refrigeration System, but that the FPS Freezer still failed to meet contract specifications and continued to suffer from the same performance problems.

         On or about June 21, 2017, Jason Kwok, Senior Manager of the Support Group for FPS, met with representatives from Dickinson, Kemper, and Nestle (one of Dickinson's biggest customers) at the Sugar City facility to conduct more tests on the FPS Freezer and Refrigeration System. Although, during the visit, representatives from Kemper and Nestle concluded the Refrigeration System was sufficient to meet contract specifications, FPS continued to maintain Dickinson's Refrigeration System was incapable of supporting the FPS Freezer.

         On July 13, 2017, Dickinson's in-house counsel sent a letter to FPS rejecting and revoking Dickinson's acceptance of the FPS Freezer. The letter demanded a full refund of the entire sum paid by Dickinson to FPS pursuant to the Agreement, and also stated:

At this time in order to mitigate Dickinson's damages, until a new replacement Tunnel Freezer can be ordered and fully operational, it would be best to retain possession of the Freezer machine and continue to operate it, even in its unsatisfactory condition, so as to limit Dickinson's continuing lost profit damages, and consequential and incidental damages.
When the time has come with a fully operational replacement Tunnel Freezer, Dickinson will make arrangements for FPS to take back possession of the defective Freezer Machine.

         Dkt. 39-5, at 3.

         FPS's in-house counsel responded on July 24, 2017, and rejected Dickinson's repudiation of the Agreement. Based in part on a report prepared by James Peterson, a consultant hired by FPS, FPS's in-house counsel suggested Dickinson's failure to provide the FPS Freezer with the contractually required refrigeration capacity was the cause of the FPS Freezer's alleged failure to meet contract specifications.[2] However, FPS conceded there were minor issues with the FPS Freezer that were capable of being resolved, and suggested litigation would not result in a satisfactory outcome for either party. The letter concluded: “FPS has the knowledge, the resources, and the resolve to provide the highest level of freezer functionality that is reasonably possible in the circumstances, but it can only do so with the ongoing cooperation of Dickinson. FPS kindly requests that such cooperation continue.” Dkt. 39-6.

         After receiving FPS' July 24, 2017, correspondence, Dickinson showed Peterson's analysis to representatives from Nestle and Kemper. Believing Peterson's conclusions were based on some flawed assumptions and speculations, they suggested Peterson should visit the Sugar City facility to inspect the FPS Freezer and Refrigeration System. Dickinson did not respond to FPS's rejection of Dickinson's repudiation letter until August 23, 2017. On that date, Dickinson's in-house counsel emailed FPS and invited Peterson to come to the “Sugar City facility to observe the freezer tunnel and to meet with Bent Wiencke of Nestle and with a representative of Kemper. . . so that they can have an impartial engineering discussion.” Dkt. 44-23, at 1. FPS agreed, and Dickinson contends it thereafter planned an “Engineer Summit” for Peterson to meet with engineers from Nestle, and representatives from Dickinson, Kemper, and Colmac Coil.[3]

         The meeting occurred on September 20-22, 2017, and Kwok and Peterson attended. FPS contends Kwok and Peterson were present at the meeting to continue FPS's attempt to resolve performance issues, as FPS believed Dickinson had accepted its request that the parties continue to work together to avoid litigation. FPS was under this impression because Dickinson responded to FPS's July 24, 2017, letter rejecting repudiation and requesting cooperation by inviting FPS's consultants to the facility to “have an impartial engineering discussion, ” and also because FPS had continued to send service technicians to the Sugar City facility to work on the FPS Freezer after Dickinson's July 13, 2017, repudiation letter. Id. In fact, FPS continued to send technicians to Dickinson's facility to troubleshoot through September, 2017. Dkt. 41, at ¶ 11. However, unbeknownst to FPS, Dickinson purchased a new tunnel freezer for approximately $1.4 million from GEA Food Solutions North America (“GEA”) in August, 2017.

         Following the September 20-22, 2017 meeting, an engineer from Kemper sent Dickinson an email suggesting the tests run during the meeting illustrated the Refrigeration System was adequate but that the FPS Freezer continued to malfunction. On September 27, 2018, Dickinson asked FPS to outline a plan for what it intended to do to modify the FPS Freezer. In response, FPS sent Dickinson a pre-litigation settlement offer on October 17, 2017. Without admitting fault, FPS offered Dickinson a full refund of the purchase price of the FPS Freezer in exchange for Dickinson's release of any claims against FPS. Believing it was still using the FPS Freezer, FPS offered Dickinson the opportunity to retain possession of, and to continue to operate, the FPS Freezer until the earlier of 150 days from: (a) the date Dickinson received FPS's full refund; or (b) the date Dickinson notified FPS in writing that the FPS Freezer was no longer required and could be removed. Dkt. 39-8, at 2. The settlement offer advised Dickinson that FPS would remove the FPS Freezer at its own expense following the aforementioned possession period, and also directed Dickinson to exercise reasonable care to avoid injury or damage to the unit prior to removal.

         Dickinson rejected FPS's settlement offer the next day. In an October 18, 2017, letter, Dickinson suggested it would work with FPS's insurance provider to obtain prompt payment of its purchase price refund and to initiate settlement discussions regarding Dickinson's “significant claim” for consequential damages. Dkt. 39-9, at 2. The letter also stated: “[Dickinson] is anticipating having the Freezer removed in January, 2018. We would seek FPS's full cooperation by coordinating the exact dates and being in agreement on the vendor FPS will use for the removal.” Id. Shortly after rejecting FPS's settlement offer, Dickinson's industrial refrigeration expert, Chuck Taylor, examined the FPS Freezer and provided opinions on its design, installation, configuration, and operation. Taylor spent over 225 hours analyzing the FPS Freezer and Refrigeration System. Dkt. 46-1, at 5.

         Dickinson thereafter filed the instant suit on December 21, 2017, pleading claims for breach of contract and, in the alternative, breach of express warranty, violations of the implied covenant of good faith and fair dealing, and promissory estoppel. On December 22, 2017, Dickinson, through counsel, sent FPS's in-house counsel a letter stating:

Please take notice that beginning on January 13, 2018, Dickinson will have a crane and initiate the multi-day process of removing the defective Freezer Machine from its facility and will temporarily have it on site. Given that Dickinson has revoked its acceptance of the Freezer Machine, FPS is invited, at its own expense, to arrange for pick-up of the uninstalled Freezer Machine. Assuming FPS will elect to salvage the Freezer Machine, please coordinate with our office so we can make the necessary arrangements.
Once the Freezer Machine is in FPS's possession, FPS will remain obligated to preserve it as evidence during the pendency of Dickinson's dispute with FPS. Failure to adequately preserve the Freezer Machine, or any other documents or evidence relevant to the parties' dispute, may constitute spoliation of evidence or subject FPS to sanctions.

         Dkt. 39-11, Exhibit G, at 3.

         Dickinson maintains the parties' lawyers were in touch through emails and telephone conversations between December 22, 2017, and January 11, 2018, but FPS never requested that it be provided with an opportunity to inspect the FPS Freezer or Refrigeration System during such communications. On January 10, 2018, Dickinson's counsel spoke with FPS's in-house counsel. Although the phone call dealt primarily with whether FPS would waive formal service of process and whether FPS had tendered the lawsuit to its insurer, Dickinson's counsel notes, “at no point in that call did [FPS's in-house counsel] raise an objection to Dickinson's intent to disassemble the FPS Freezer three days later nor make any demand whatsoever that FPS be allowed to test or to inspect the FPS Freezer or Refrigeration System prior to disassembly.” Dkt. 44-26, at ¶ 23.

         However, on January 12, 2018, the day before Dickinson planned to disassemble the FPS Freezer, Kwok emailed Todd Campbell, Dickinson's Director of Operations, and stated FPS would have people at the Sugar City facility to observe and record the unit's dismantling and to “arrange transportation to pick up” the FPS Freezer so that FPS could store and preserve it. Dkt. 39-12, Exhibit H, at 3. Campbell replied FPS could not “monitor[] anything.” Id., at 2. On January 17, 2018, four days after the FPS Freezer and Refrigeration System were removed and dismantled, an independent contractor for FPS emailed Campbell that he had been asked by FPS to get some photos “and assess pick up and storage of the unit.” Id. Campbell responded, “[a]t this point you or anyone associated with FPS are not allowed on site. No. photos or access. When that changes FPS will be notified and things can move forward.” Id.

         The extraction of the FPS Freezer took place on January 13, 2018. The parties offer widely varying accounts of Dickinson's disassembly and subsequent storage of the unit. Dickinson contends it hired a number of qualified professional contractors, including most of the contractors who initially installed the FPS Freezer, to carefully disassemble it. Dickinson also hired Idaho Steel Products, Inc. (“Idaho Steel”), a third-party contractor that specializes in the construction, installation, and removal of food processing equipment, to assume primary responsibility for disassembly of the FPS Freezer.

         Dickinson maintains that, given the sheer size of the FPS Freezer, Idaho Steel's personnel had to remove the welding where the two halves of the FPS Freezer had originally been welded together. Idaho Steel personnel then disconnected the belts and chains and the four connecting bolts for each fan motor and dismounted the various fans and engines from the FPS Freezer. Dickinson's employees subsequently worked to store the FPS Freezer, its component parts, and its control panel, in Dickinson's parking lot in crates and under tarps. Dickinson states it asked its employees and Idaho Steel to take special care and every reasonable precaution in the disassembly process to ensure that the FPS Freezer and its component parts were not damaged, destroyed, or altered any more than reasonably necessary during removal.

         FPS alleges Dickinson instead used straight edges to cut the FPS Freezer in half and cut the legs out from under the two halves. Rather than simply disconnecting or unhooking them, FPS suggests Dickinson severed all refrigeration, water, steam, air lines, and electrical wiring and conduits from the FPS Freezer. FPS contends Dickinson also severed fan motors, thumper motors, and chains and pipe sections from the FPS Freezer. Dickinson allegedly used duct tape to cover the “gaping holes it had created” with removal of such parts, as well as to cover “the massive incision it cut down the middle of the FPS Freezer.” Dkt. 39-1, at 8.

         The parties also disagree over Dickinson's subsequent storage of the dismantled unit. While Dickinson claims it has carefully stored the disassembled FPS Freezer in its parking lot-“the only place with adequate space at Dickinson's Sugar City Facility to store it”-in crates covered with tarps, FPS alleges all parts were “dumped” into crates and have been exposed to the elements ever since the January 13, 2018, disassembly. Compare Dkt. 44, at 17 with Dkt. 39-1, at 8. FPS contends such exposure has resulted in significant damage above and beyond that sustained during Dickinson's initial removal. For instance:

A ‘refrigeration coil' consists of a series of pipes and ‘fins' that dissipate heat. . . [t]he pipes of the refrigeration coils have suffered weathering and damage; [t]he conduit piping, which feeds cooling power to the FPS Freezer, has been . . . exposed to the elements for prolonged periods of time and will require dehydrating and chemical treatment to be restored, if at all; [r]ust appears throughout the FPS Freezer; [v]ermin have invested the FPS Freezer and the floor is now covered in droppings; [and] the computer control panel shows signs of standing water and the circuitry is weathered.

         Dkt. 39-1, at 9-10.

         FPS also highlights Dickinson significantly altered the Refrigeration System to work with its new GEA freezer after disassembling the FPS Freezer. As a result, “significantly meaningful discrepancies exist within the various paper records relating to the FPS Freezer's design and installation, ” including “differences in dimensions, equipment make and model, configurations, and diagnostic numbers.” Id., at 10. Given such discrepancies, FPS contends “testing of the actual FPS Freezer and the actual refrigeration infrastructure on site at the Plant at the time of operation (as opposed to relying on documents) is critical.” Dkt. 39-1, at 10.

         Because Dickinson barred FPS access to the Sugar City facility, FPS contends it was unable to assess the unit's condition until October 16, 2018, during a site visit with FPS's counsel and technical expert arranged through discovery. After FPS's expert determined there were multiple tests he could not run due to the disassembly and storage of the FPS Freezer and subsequent modification of the Refrigeration System, FPS's counsel conferred without resolution with Dickinson's counsel. FPS's counsel thereafter filed the instant Motion for Spoliation, seeking dismissal as a sanction for Dickinson's purportedly willful destruction of the key evidence in this suit.


         The authority to sanction a party who has despoiled evidence is based on Federal Rule of Civil Procedure 37 and on the court's inherent power to levy sanctions in response to abusive litigation practices. Leon v. IDX Sys., Corp., 464 F.3d 951, 958 (9th Cir. 2006). Rule 37 sanctions are available when a party “fails to obey an order to provide or permit discovery.” Id. (citing Fjelstad v. Am. Honda Motor Co., Inc., 762 F.2d 1334, 1337-1338 (9th Cir. 1985)). Where, as here, Rule 37 is not applicable because there was no associated discovery order, federal trial courts “are invested with inherent powers that are governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” Unigard Sec. Ins. Co. v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 368 (9th Cir. 1992) (internal quotation marks and citations omitted). The court's inherent powers include “‘the broad discretion to make discovery and evidentiary rulings conducive to the conduct of a fair and orderly trial.'” Id. (quoting Campbell Indus. V. M/V Gemini, 619 F.2d 24, 27 (9th Cir. 1980)).

         A court's discretion in imposing sanctions can range in severity from minor sanctions, such as awarding attorneys' fees, to more severe sanctions including permitting a jury to draw an adverse inference against a party responsible for the destruction of evidence, ordering the exclusion of evidence, or even dismissal of claims. Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993); Reinsdorf v. Skechers U.S.A., 296 F.R.D. 604, 626 (C.D. Cal. 2013). To decide which spoliation sanction, if any, to impose, courts generally consider: (1) the degree of fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by the opposing party; and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party. Reinsdorf, 296 F.R.D. at 626.

         The exercise of a court's inherent powers must be applied with “restraint and discretion” and only to the degree necessary to redress the abuse. Chambers v. NASCO, Inc., 501 U.S. 32, 45 (1991); see also Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3rd Cir.1994) (courts should choose “the least onerous sanction corresponding to the willfulness of the destructive act and the prejudice suffered by the victim”). Accordingly, the determination of an appropriate sanction for spoliation is “confined to the sound discretion of the trial judge, and is assessed on a case-by-case basis.” Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir.2001) (internal citations omitted).

         IV. ANALYSIS

         As an initial matter, the Court must address Dickinson's claim that spoliation sanctions are unavailable because it did not “destroy” any evidence. Dkt. 44, at 28. Dickinson suggests it merely “disassembled” the FPS Freezer and Refrigeration System, and that courts have found spoliation sanctions are unavailable where evidence is not lost or destroyed. Id. Dickinson's definition is overly restrictive. Spoliation is “‘the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence[, ] in pending or reasonably foreseeable litigation.'” Reinsdorf, 296 F.R.D. at 626 (quoting Zubalake v. UBS Wardburg, LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003) (emphasis added)). FPS has presented substantial evidence to establish the FPS Freezer and Refrigeration System were not simply “disassembled, ” but were at least significantly altered, if not destroyed.

         For instance, with respect to the FPS Freezer, Dickinson did not simply remove the welding between the two original halves, but cut metal and plastic inside the FPS Freezer that were not part of the mid-line. Dkt. 41, at ¶¶ 15, 17-18. All six of the unit's “fins” used to dissipate heat “have been completely bent beyond repair” and have large gashes in them. Id., at ¶ 13. Other large metal components are severely dented. Dkt. 41-7. The conduit piping, which feeds cooling power to the FPS Freezer, has been cut and sections have been removed. Dkt. 41, at ¶ 15. The insulation encapsulating the FPS Freezer body has been shredded. Id., at ¶ 16. The conveyor belt support bed, which runs the entire length of the FPS Freezer, has been cut in half, and the conveyor belt chain mail has been removed from the freezer “and dumped in a wooden box.” Id., at ¶¶ 17-18. In addition, components such as fan motors, gear motors, and computer wiring used to connect the FPS Freezer to its computer control panel have all been severed, and the mounting brackets and connection points used to attach these items to the FPS Freezer have also been cut. Id., at ¶ 19.

         Dickinson also significantly altered the Refrigeration System. Specifically:

The FPS Freezer only required a single ammonia supply line (“LTRL”), coil connection, and defrost condensate (“DC”) riser for each refrigeration coil. Since removing the FPS Freezer, Dickinson has reconfigured its refrigeration infrastructure by splitting its ...

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