Hog Supplier Allowed Discovery to Prove Smithfield Foods Impermissibly Favored Other Vendors Despite Contract Clause
The paths that lead to the North Carolina Business Court are often paved with the broken hearts of business partners whose interests, and fortunes, have diverged. Often as not, the Court’s opinions survey the wreckage, identify factors that may have caused the chaos, but lack a record of context to paint the landscape of the corporate collision. Not so in Maxwell Foods, LLC v. Smithfield Foods, Inc., 2021 NCBC 50, where one of the country’s largest suppliers of swine sued a mammoth pork producer claiming sharp business practices fueled Smithfield’s ascent, and Maxwell’s approaching demise. As Judge Conrad summarized plaintiff’s lament (¶ 10):
“Smithfield’s success is Maxwell’s sorrow.”
In happier times, under a mid-90s output contract, Smithfield bought all of Maxwell’s hog output from its Virginia and Carolinas farms up to a monthly cap of 155,000. These purchases, the Court noted, joined those from hundreds of Smithfield-owned farms and other independent suppliers like Maxwell. It formed a giant supply pipeline that leads Smithfield, in just three East Coast plants among a larger footprint, to process more than 55,000 hogs per day. (Id. ¶ 4-5).
The Maxwell-Smithfield part of this massive industry appears to have collapsed in dispute over decreased purchases by Smithfield and the failure of key pricing mechanisms: the metric picked by the parties to set per-pound purchase prices, and a “most-favored nation” clause addressing how Smithfield’s relationship to other hog suppliers compared to its business deal with Maxwell. Smithfield’s motion to dismiss did not target the claim that it breached the output provision by halving its purchases from Maxwell in April 2020. That claim will proceed against Maxwell’s allegation that Smithfield favored its own affiliated suppliers at the expense of Maxwell’s interests. (Id. ¶ 12).
Most-Favored-Nation Clause
The Court reported the MFN clause as affording to Maxwell “the same economic incentives” provided to all “other major swine suppliers” and offering “the benefit of future changes in economic benefits given said major swine suppliers during the term of this contract.” Smithfield argued the provision was unenforceable as vague and indefinite, and focused on the purportedly boundless nature of the term “economic benefits.” (Id. ¶¶ 18, 23). Judge Conrad showed little interest, particularly at a pre-discovery phase, in limiting Maxwell’s access to discovery to support its view of the MFN clause. Noting that “[p]arties presumably intend that their agreements will be effective,” the Court explained it “must take language as it is and people as they are. All agreements have some degree of indefiniteness and some degree of uncertainty.” (Id. ¶ 21) (quoting Carolina Helicopter Corp. v. Cutter Realty Co., 263 N.C. 139, 146 (1964)). The Court found no basis to short-circuit litigation about application of the MFN clause based on a failure to discern what the parties were after when they drafted the provision (id. ¶ 22):
“The most-favored-nation clause is hardly so vague as to defy understanding.
…
The undeniable intent was to ensure that Smithfield would treat Maxwell just as well as similarly situated suppliers. Clauses like this one are both common and commonly enforced.”
Setting Prices for an Output Contract
While the Court found the parties’ MFN was “a fixed and final obligation,” it was just as exacting in analyzing Maxwell’s claims that Smithfield had a duty to negotiate in good faith revised terms after the pricing mechanism selected by the parties was no longer viable. (Id. ¶ 28). The Court found that the contract required the parties to “designate” a new basis for determining market value of purchases, but “[m]issing is any promise to negotiate the new basis in good faith.” (Id. ¶ 32). Instead, the Court offered Maxwell what the contract provided regarding pricing disputes: an opportunity “to arbitrate their disagreements, not to negotiate them.” As Judge Conrad noted, the Court “must construe [the agreement] as written, leaving out ‘imagined terms’ that the parties could have included but did not.” (Id. ¶ 33) (quoting Morrell v. Hardin Creek, Inc., 371 N.C. 672, 686 (2018)).
Chapter 75 Claims Based on Antitrust Allegations
Maxwell’s Chapter 75 claim followed Smithfield’s failed attempt to remove the action to federal court. The claim centered around allegations that Smithfield “abused its monopoly buyer power . . . to target Maxwell unfairly and to force Maxwell out of the hog business.” (Id. ¶ 13). While it successfully broached the specter of treble damages, it also brought Maxwell something it unsuccessfully opposed: designation to the Business Court. The Court retained jurisdiction because a material issue of antitrust law needed to be resolved for Maxwell’s claim to proceed. (Id.). See N.C.G.S. § 7A-45.4(a)(3).
Maxwell alleged that Smithfield’s accumulated market power – through vertical integration and industry consolidation – led to control of the buyer’s market that was used to pressure Maxwell out of business by favoring itself and other vendors. The Court found there was “no serious question that these are allegations of antitrust misconduct” that must meet the pleading requirements for a monopoly on a market’s buyer’s side – a monopsony. (Id. ¶ 39). As the Court noted, it is well settled that “the failure of the antitrust claim also defeats liability under section 75-1.1” (Id. ¶ 42). The Court dismissed the Chapter 75 claim based on Maxwell’s failure to adequately plead required monopsony elements, including Smithfield’s monopoly power in the relevant market and “willful acquisition or maintenance” of it. (Id. ¶ 40).
Takeaways
- Finding a contract void for vagueness at a pleading stage is a rare outcome, even where challenged terms are broad, as the Business Court warns that “it would be a mistake to equate breadth with ambiguity, much less indefiniteness.” (Id. ¶ 24).
- Where an unfair and deceptive trade practices claim is based on antitrust misconduct, a failure to adequately plead that underlying violation also fells the Chapter 75 claim.
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