Summary of a Recent
Judicial Development in
Production Contracts

Tyson Foods Liable for
$891,660.00 in Damages

Harrison M. Pittman
Staff Attorney

The Arkansas Supreme Court has affirmed a decision that awarded an Arkansas hog farmer $891,600.00 in damages in an action brought by the hog farmer against Tyson Foods, Inc., for fraud, promissory estoppel, and negligence. Tyson Foods, Inc. v. Davis, 66 S.W.3d 568, 570 (Ark. 2002). The court ruled that the plaintiff's fraud and promissory estoppel claims were not precluded by the three-year statute of limitations and that the claims submitted to the jury were supported by substantial evidence. See id. at 571. A dissenting opinion stated that the hog farmer's fraud claim was precluded by the three-year statute of limitations. See id. at 581.

Tom Johnson was a regional manager for Tyson Foods, Inc. ("Tyson"). See id. He testified that in approximately 1990 Tyson decided to expand its hog processing operation into Oklahoma and Missouri. See id. Johnson testified that Tyson began constructing the necessary facilities in Oklahoma and Missouri soon thereafter. See id. According to Johnson's testimony, "problems arose in completing the finishing units in Missouri when another producer there got into pollution problems, and the State of Missouri stopped issuing permits to operate waste lagoon systems." Id. Johnson testified that this prompted Tyson to consider the "bedded-floor" system as an alternative method of raising hogs because it would not require the environmental permits that the slatted concrete floor housing units in Missouri required. See id. at 571-72.

The bedded-floor program is a "process of raising hogs indoors on a dirt floor that is covered with sixteen to eighteen inches of 'bedding' consisting of either wood shavings, wood shavings combined with straw, or rice hulls." Id. at 571, n.1. Tyson studied the bedded-floor program extensively and eventually experimented with its first bedded-floor program in 1994. See id. at 572. Johnson testified that Tyson was pleased with the results of its studies and experiments of the bedded-floor program and that "[a]t this point . . . Tyson decided to go forward with a bedded-floor program as a 'temporary stop-gap measure until we could get things built in Missouri.'" Id.

In the summer of 1994, Johnson traveled to an Arkansas Pork Producers meeting with a hog farmer named Roger Hammond. See id. While on this trip, Johnson and Hammond discussed the possibility of Hammond's raising hogs for Tyson using the bedded-floor program. See id. Johnson testified that he explained to Hammond that the bedded-floor program was only a temporary program and would only be used until the construction was completed on the Missouri hog units. See id.

Hammond later informed Don Davis, the plaintiff, about Tyson's intention to raise hogs using the bedded-floor program. See id. Davis had several empty turkey houses on his property that were well-suited for the bedded-floor program. See id. Davis testified that Hammond explained to him that the bedded-floor program would only be short term--only one or two years. See id. Davis determined that the program was not a good business opportunity for him because "it was not financially feasible over such a short time." Id.

Davis testified that he later called Tyson "to see if he could look at one of their bedded units to understand how they were operated." Id. Davis testified that "when he called Tyson, he was connected with Johnson who then asked if he would be interested in raising hogs for Tyson." Id. Davis and Johnson later met on Davis's farm to discuss the matter in more detail. See id.

Davis testified that at this meeting Johnson informed him that the program was not short term, as allegedly reported by Hammond. See id. at 573. According to Davis, he explained to Johnson that he was not interested in raising hogs for only a short period of time because he needed "twenty years or better" to make the opportunity financially feasible. See id. Davis testified that Johnson stated that Tyson only gave year-to-year contracts with every grower with whom it contracted. See id. Davis also testified, however, that Johnson then told him that Tyson did not plan on going out of business and that "'well, I don't see any reason it won't last twenty years or till death do us part.'" Id. A witness to the conversation testified that he heard Johnson say to Davis that "'he would be growing hogs all his life if he wanted to.'" Id.

Johnson claimed that he never represented to Davis that Tyson would provide hogs for twenty years or longer or that the bedded-floor program was a long-term business prospect. See id. at 572-73. Johnson testified that he specifically explained to Davis that the bedded-floor program was temporary and would only last until the Missouri facilities were able to raise hogs. See id.

After his meeting with Johnson, Davis met with his banker, Don Stimpson, to inquire about obtaining an operating loan for the hog operation. See id. at 573. Davis testified that he communicated to Stimpson what Johnson had allegedly communicated to him. See id. Stimpson testified that he called Johnson to verify what Davis had told him. See id. Stimpson testified that Johnson stated to him that "'Don Davis was going to be growing hogs as long as he wants.'" Id. The bank subsequently loaned Davis the money he needed to start his hog farming operation. See id. Davis then signed a one year contract with Tyson, and Tyson delivered the first batch of hogs to Davis. See id.

Davis testified that in the Spring of 1995 "when Tyson brought some individuals by to observe the operation, he overheard the Tyson employee telling those observing that the bedded-floor program was only short term." Id. According to Davis, when he confronted Johnson with this information he was assured by Johnson that this information was inaccurate and that he had not heard anything from the "big wigs" about the program being temporary. See id. Johnson denied making these representations to Davis. See id. Davis also testified that Johnson continued to inquire about whether he knew of any other facilities which could be placed in the bedded-floor program. See id. at 573-74.

According to Davis, Johnson came out to his farm in the summer of 1995 to discuss the possibility of purchasing more land so that Davis could raise more hogs. See id. at 574. Davis claimed that when he mentioned his concerns about maintaining a continued supply of hogs that Johnson assured him that "'I'm going to have hogs . . . hogs is no problem. You'll get plenty of hogs.'" Id. Davis claimed that based upon this representation he purchased another farm so that he could expand his hog farming operation. See id.

In 1996 Johnson was promoted and replaced by Jack Gorely. See id. Reece Hudson was assigned as a liaison to Davis's farm at about this same time. See id. Hudson testified that Davis inquired "again and again" about whether he would receive hogs in the future, telling him that "he was promised hogs forever by Johnson." Id. Hudson testified that "he told Davis he understood it was for a 'certain length of time' under his contract." Id. Davis testified that Hudson told him during this particular conversation the bedded-floor operations were doing well and that "'they was gonna be around for years to come.'" Id. Davis continued to receive hogs on batch-to-batch contracts, pursuant to the terms and conditions of the year-to-year contracts he had signed with Tyson. See id.

Davis testified that in December, 1998, he was notified that Tyson would not deliver any more hogs to him. See id. He claimed that this was when "he first learned that Tyson had misrepresented to him that the bedded-floor operation was a long-term program." Id. Davis brought an action against Tyson for negligence, fraud, and promissory estoppel on February 24, 1999. See id. at 575, 576. The general verdict form returned by the jury stated that "[w]e the jury find for Don Davis on his claim for damages and award damages against Tyson Foods, Inc., in the amount of $891,660.00." Id. Tyson appealed this decision to the Arkansas Supreme Court. See id.

Tyson argued that Davis was barred by the applicable statute of limitations from asserting claims for fraud and promissory estoppel and that "Davis waived any claim for fraud or implied contract by signing and performing under new contracts after Davis admitted he knew there was no long-term contractual obligation to provide him with hogs." Id. at 577-79. Tyson also argued "that the trial court erred in denying its motion of a directed verdict on a lack of substantial evidence and particularly on a lack of evidence of reasonable reliance." Id. at 579. Finally, Tyson argued that the evidence pertaining to damages that was submitted to the jury was "fatally flawed" and that the jury was incorrectly instructed on the issue of damages. See id. at 580. The Arkansas Supreme Court rejected each of these arguments. See id. at 577-80.

The court did not specifically address either the promissory estoppel or negligence arguments, but rather focused primarily on Davis's fraud claim. See id. at 577-81. The court stated that for Tyson to prevail on its objections to the negligence cause of action, it must establish that the statute of limitations had run for both the fraud and promissory estoppel claims. See id. at 576. Because the court ruled that the fraud action was not barred by the three-year statute of limitations, it was not necessary to discuss either the negligence or promissory estoppel claims. See id.

The court stated that "[f]undamental to an understanding of this case is recognizing the distinctions between what each party asserts as the role the contracts play in this case." See id. On the one hand, Tyson asserted that the parties' relationship was defined solely by the terms of the year-to-year contracts. See id. Tyson argued that by claiming that he was promised hogs on a long-term basis "Davis is asserting an oral modification to the one-year written contracts." Tyson also argued that "at the latest in October 1995, Davis knew there was no such obligation because the one-year contract on the new farm executed at that time contained no such obligation." Id. Davis, on the other hand, argued that "the written contracts provided . . . what Tyson represented they would provide, and what he expected, because Johnson represented to him that the bedded-hog program would be handled like the poultry programs where the contracts would be one year or less but where Tyson was in the business and provided poultry for the long term." Id.

After examining the allegations in Davis's complaint, the court explained that Davis was not attempting to argue that Tyson had a contractual obligation to deliver hogs to him long-term, "but rather that he was induced to enter into bedded-floor hog production for Tyson because of misrepresentations by Tyson of its market for such production." Id. at 575. The court stated that "[t]he contracts and their contents cast no light on the issue of the representations made by Tyson because Davis was expecting precisely the short-term contracts he received." Id. The court added that "[t]his is a misrepresentation, fraud, or promissory estoppel cause of action, not a contract cause of action." Id.

The court next examined Tyson's argument that Davis was barred by the statute of limitations from bringing an action for fraud. See id. at 576. Under Arkansas law, the statute of limitations for a fraud action is three years. See id. at 579 (citing Ark. Code Ann. § 16-56-105 (1987) and Hampton v. Taylor, 887 S.W.2d 535 (Ark. 1994)). To maintain an action for the tort of fraud a plaintiff must prove by a preponderance of the evidence "a false representation of a material fact; knowledge that the representation is false or that there is insufficient evidence upon which to make the representation; intent to induce action or inaction in reliance upon the representation; justifiable reliance on the representation; and damage suffered as a result of the reliance." Id. at 577 (citing Ultracuts Ltd. v. Wal-Mart Stores, Inc., 33 S.W.3d 128 (2000) and Medlock v. Burden, 900 S.W.2d 552 (1995)).

Tyson asserted that "the last date on which Davis might reasonably argue he knew he had been lied to was in October 1995 when he signed a one-year contract on the new farm." Id. Tyson contends that because the written contract stated that hogs would only be delivered for one year, Davis "had to know that there was a problem." Id. Because more than three years passed before Davis filed suit (February 24, 1999), Tyson contended that the fraud action was barred by the statute of limitations. See id. The court rejected this argument. See id.

The court stated that "[d]amages are an essential element to fraud, and there must be an allegation of sufficient facts to satisfy those elements or the case is subject to a motion to dismiss" and that "[f]alse or fraudulent representations not resulting in injury are not actionable." Id. (citing McAdams v. Ellington, 970 S.W.2d 203 (1998) and Harris v. Byers, 197 S.W.2d 730 (1946)). The court reasoned that Davis did not suffer an injury, thereby giving rise to a fraud action, "until he was told by Tyson in 1998 that he would receive no more hogs." See id. The court added that "Davis could not have filed a complaint for fraud until 1998 when he was told by Tyson there would be no more hogs without suffering a dismissal." Id. Because these events occurred within three years of Davis's filing suit against Tyson, the court concluded that there was no merit to Tyson's statute of limitations argument. See id.

The court also rejected Tyson's argument that "Davis waived any claim for fraud or implied contract by signing and performing under new contracts after Davis admitted he knew there was no long-term contractual obligation to provide him with hogs." Id. at 579. The court stated that "Davis has not asserted a contractual obligation to provide him with hogs long-term. Davis testified he received the contracts Tyson represented would be provided, and that because the bedded-floor program was being run as the poultry business was run, he did not expect a long-term contract." The court concluded "[t]hus, there [was] no waiver under contract." Id. The court added that "Davis's execution and performance under the short-term contracts does not show he had knowledge of the misrepresentation or, in other words, that he knew Tyson intended to cut off the bedded-floor program once the Missouri finishing units were ready. There is no merit to the claim of waiver." Id.

In addition, the court rejected Tyson's argument that the trial court erred when it denied Tyson's motion for a directed verdict based on "a lack of substantial evidence and particularly on a lack of evidence of reasonable reliance." Id. The court explained that "[s]ubstantial evidence is that which goes beyond suspicion or conjecture and is sufficient to compel a conclusion one way or the other." Id. (citing Ethyl Corporation v. Johnson, 49 S.W.3d 644 (2001)). The court stated that although the testimony was conflicting, "there was substantial testimony and other evidence in this case that was sufficient to compel a conclusion one way or the other." Id. at 580.

Finally, the court rejected Tyson's argument that the jury was incorrectly instructed on damages and that "the evidence submitted on damages was fatally flawed in that a lost-profits analysis was improper, and that instead the measure of damages should have been under a reliance analysis, in other words, what Davis bought minus what he received." Id. The court stated that during the trial both sides analyzed "loss of profits as well as losses due to purchase and sale of real property and equipment." Id. The court also stated that "[b]oth parties appeared to argue what they believed the total economic loss was. There was sufficient evidence. The evidence was presented to the jury, and the general verdict casts no light on what decision the jury reached other than liability and an amount of damages." Id.The court stated that "[w]e are left in the position of not knowing the basis for the jury's verdict, and we will not question nor theorize about the jury's findings." Id. (citing Esry v. Carden, 942 S.W.2d 846 (1997)).

The dissenting opinion stated that Davis was precluded by the three-year statute of limitations from bringing a fraud action against Tyson. See id. at 581. The dissent reasoned that Davis was given notice that Tyson's alleged misrepresentations were false on May 1995, when he overheard a Tyson employee state that the bedded-floor program was only a short-term arrangement. Id. at 582. The dissent also reasoned that "[n]ot only was Davis told in May, 1995, that there was no long-term deal, he read and signed a written contract on October 19, 1995, expressing clearly that there was no long-term commitment." Id. Further, the written contract "specifically stated that it superseded prior agreements between the parties 'whether oral or written.'" Id.

The dissent stated that "[o]nce alerted to the false representation of the long-term agreement, and thereafter signing a one-year agreement extinguishing all oral agreements, it cannot be disputed that Davis had full knowledge that any cause of action that he had for fraud could have been filed at any time." Id. The dissent added that "Davis formally acknowledged this repudiation of any long-term commitment when he signed the written contract for one year in October of 1995, and testified that it did not contain his alleged long-term agreement." Id. The dissent concluded that "[n]early four years elapsed after he signed this contract, and before he filed this action. Clearly the statute of limitations had run." Id.

This case summary was prepared in September, 2002.