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Yanez v. Graco Inc.

United States District Court, D. Minnesota

September 8, 2014

CHARLES YANEZ, Plaintiff,
v.
GRACO INC., MIDWAY INDUSTRIAL SUPPLY CO. INC., J.P. FLEXIBLES, INC., and EXITFLEX USA, INC., Defendants

Page 1017

Duane A. Lillehaug, MARING WILLIAMS LAW OFFICE, PC, Fargo, ND, for plaintiff.

Scott M. Rusert, NILAN JOHNSON LEWIS P.A., Minneapolis, MN, for defendants Graco Inc. and Midway Industrial Supply Co., Inc.

Nicholas C. Grant and Paul F. Ebeltoft, EBELTHOFT SICKLER LAWYERS PLLC, Dickinson, ND, for defendants J.P. Flexibles, Inc. and ExitFlex USA, Inc.

Page 1018

MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

JOHN R. TUNHEIM, United States District Judge.

Plaintiff Charles Yanez was injured while working as a paint sprayer at DMI Industries, Inc. (" DMI" ) in West Fargo, North Dakota. He suffered injuries to his left hand when a whip hose that was part of a paint spray system failed while he was high-pressure spray painting the inside of a wind turbine tower. The hose itself was manufactured by a Swiss corporation, ExitFlex S.A. (" ExitFlex SA" ), which is not a party to this action. Yanez instead brings this products liability action against various other entities that were involved in the distribution of the hose and paint system: J.P. Flexibles, Inc. (" JP Flexibles" ), the now-dissolved United States distributor for ExitFlex SA's products; ExitFlex USA, Inc. (" ExitFlex USA" ), the current United States distributor for ExitFlex SA's products; GRACO, Inc. (" Graco" ), a Minnesota corporation that purchased the hose to be used in a paint spray system; and Midway Industrial Supply Co. (" Midway" ), which installed the paint spray system at DMI. All defendants move for summary judgment, arguing that they are not the manufacturers of the hose and cannot be held liable as nonmanufacturing sellers under North Dakota law. The Court concludes that a reasonable jury could find both that JP Flexibles falls within the definition of manufacturer under North Dakota law and that ExitFlex USA may be held liable as a successor to JP Flexibles, and will thus deny JP Flexibles' and ExitFlex USA's motions for summary judgment. With regard to Graco and Midway, however, the Court concludes that no reasonable jury could find that either can be held liable under North Dakota law and will grant their motion for summary judgment.

BACKGROUND

The Court will recite the relevant background facts according to the various entities involved in the manufacture and distribution of the hose and paint system that Yanez claims caused his injury.

I. EXITFLEX SA

The hose in question, often referred to as a " Graco 246193" or a " WE24" hose (hereinafter " the hose" ), was manufactured

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by ExitFlex SA. (Aff. of Joseph Medvecky in Supp. of J.P. Flexibles' Mot. for Summ. J. (" Medvecky Aff. Docket No. 155" ) ¶ 7, Jan. 15, 2014, Docket No. 155.) ExitFlex SA is a Swiss corporation engaged in the business of manufacturing hoses, fittings, and other component parts. ( Id. ¶ 6.) ExitFlex SA was 100% owned by a man named Marcel Leisi from 1985 through 2006 and Leisi was its sole shareholder. (Aff. of Duane A. Lillehaug, Ex. C (" J.P. Flexibles & ExitFlex USAs Resp. to Pl.'s Interrogs." ) at 2, Feb. 5, 2014, Docket No. 166.)[1] Leisi was also the 100% owner and sole shareholder of a separate Swiss corporation called Exit S.A. (" Exit SA" ) from 1985 through 2006. ( Id. ) Joseph Medvecky, the president of JP Flexibles (Aff. of Joseph Medvecky in Supp. of ExitFlex USA's Mot. for Summ. J. (" Medvecky Aff. Docket No. 150" ) ¶ 1, Jan. 15, 2014, Docket No. 150), also stated in his affidavit that " [a]t all times relevant to this case, Exit SA was the sole shareholder of ExitFlex SA" (Medvecky Aff. Docket No. 155 ¶ 15). Leisi's ownership of ExitFlex SA ended in 2010. (Aff. of Nicholas C. Grant, Ex. 1 (Dep. of Joseph M. Medvecky (" Medvecky Dep." )) 116:3-11, Jan. 15, 2014, Docket No. 156.)

II. JP FLEXIBLES AND EXITFLEX SA

JP Flexibles was the exclusive distributor of ExitFlex SA's products in the United States beginning in 1985. (Medvecky Dep. 6:12-18; 7:16-19.) It sold ExitFlex SA's products to distributors and original equipment manufacturers (" OEMs" ) in the paint spray industry. ( Id. 9:10-19.) JP Flexibles did not do business with any other products besides those from ExitFlex SA. ( Id. 8:21-24.) OEMs typically purchase a product from a manufacturer like ExitFlex SA and incorporate it into a product of its own. ( Id. 9:17-23.) Graco is an OEM that JP Flexibles sold to, which Medvecky called " the leader in [the paint spray industry]," explaining that " everybody knows them." ( Id. 15:11-20.) According to Medvecky, JP Flexibles " did not design, manufacture or apply end fittings or identification band to hoses of the type at issue in this case, but rather, was a mere reseller of hoses of the general type involved in this litigation which were designed, manufactured and fitted by others not under the direction or control of [JP Flexibles]." (Medvecky Aff. Docket No. 155 ¶ 4.)

A. Ownership of JP Flexibles

Medvecky explains that

[w]hen it was incorporated in 1985, J.P. Flexibles, Inc. was owned in the following proportions: J.P. Fatzer -- 80%; Exit SA -- 20%. After beginning my employment in 1998, J.P. Flexibles, Inc. was owned in the following proportions: J.P. Fatzer -- 75%; Exit SA -- 20%; and myself, Joseph Medvecky -- 5%. At some point in 2000, my ownership interest was increased to 10%, with J.P. Fatzer continuing to own 70%, and Exit SA owning 20%. This ownership percentage did not change until July 21, 2006. Following his death on April 13, 2005, the Estate of J.P. Fatzer, on July 21, 2006, sold all of his stock in J.P. Flexibles, Inc. to Exit SA. The sale of J.P. Fatzer's stock by his Estate was memorialized by the . . . 'Stock Purchase Agreement.'

( Id. ¶ ¶ 8-13.)

Medvecky testified in his deposition, taken on August 9, 2012: " After J.P. Fatzer

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died, his 70 percent was purchased by ExitFlex SA. So it was now 90 percent ExitFlex SA, 10 percent myself." (Medvecky Dep. 118:7-10.) Medvecky's 5% share increased to 10% sometime around the year 2000, and Fatzer's share accordingly decreased to 70%. ( Id. 117:22-118:2.) Fatzer died in April 2005, but the purchase of the shares took place in 2006. ( Id. 118:11-18.) When ExitFlex USA was formed in 2007, its shares were 90 percent owned by ExitFlex SA and 10 percent by Medvecky. ( Id. 118:19-119:8.)

B. Transition to ExitFlex USA

In his deposition, Medvecky explained that the transition from JP Flexibles to ExitFlex USA occurred after JP Flexibles lost several employees in 2005, including J.P. Fatzer, and that sometime in the next year, ExitFlex SA bought the shares of J.P. Fatzer from his estate and became a 90% shareholder. (Medvecky Dep. 12:1-18.) With only two shareholders left

then -- there was a business decision with the two shareholders together, what we want to do, and we decided to form a new corporation. I sought out a lawyer and we had a contract written up and we had an asset purchase. We didn't assume any liabilities of J.P. Flexibles, and then [o]n April 1st, 2007, ExitFlex USA started business.

( Id. 12:20-13:3.) ExitFlex USA, which had been incorporated in New Jersey on February 27, 2007, (Medvecky Aff. Docket No. 150 ¶ 3; see also id., Ex. B) purchased all of J.P. Flexibles' assets on April 1, 2007, pursuant to an " Asset Purchase Agreement," under which ExitFlex USA did not assume any liabilities of JP Flexibles. ( Id. ¶ ¶ 4-5; see also id., Ex. C.) The Asset Purchase Agreement included the following section:

No Assumption of Liabilities. Except as set forth in Sections 1.1(e), 1.1(f), and 1.1(g), Buyer is acquiring the Assets hereunder without any assumption of Seller's debts, obligations, liabilities, accounts payable, or commitments . . . . Seller shall pay and discharge . . . . [a]ll obligations and liabilities of Seller whether arising before or after the Closing Date for contractual obligations in connection with products and services sold, distributed or provided by Seller, including liabilities for personal injury . . . based on product liability claims . . . .

( Id., Ex. C ¶ 1.3 (formatting omitted).) JP Flexibles was dissolved as a corporation on January 7, 2008. ( Id. ¶ 2; see also id., Ex. A.) During the period of overlap when both entities existed, ExitFlex USA took over sales on April 1, 2007 and, according to Medvecky, " J.P. Flexibles continued collecting the bills, paying their -- all their obligations, collecting all the receivables that were owed to them and then by December 31 [2007] they dissolved." ( Id. 13:14-21.) All of the employees from JP Flexibles became employees of ExitFlex USA as of April 1, 2007 (there were two at the time)[2], and ExitFlex USA performed the account-collecting services and other closing work for JP Flexibles. ( Id. 14:8-24.)

Medvecky testified that there was no " difference in the product line between J.P. Flexibles and ExitFlex USA," and that it was " always ExitFlex SA's products for both companies." ( Id. 14:25-15:7.) He also testified that ExitFlex USA's business operation has been " substantially the same" as JP Flexibles; it is also the exclusive distributor of ExitFlex SA products in

Page 1021

the United States. ( Id. 10:21-11:3.) Like JP Flexibles, ExitFlex SA products are the only products ExitFlex USA distributes. ( Id. 11:18-21.)

When asked if Marcel Leisi was ever affiliated with ExitFlex USA in any capacity, Medvecky stated that " [ExitFlex SA] w[as] a stockholder in the company and he in turn owned that company. So yes," and answered " [c]orrect" to the follow-up question of whether " [Leisi] owned ExitFlex SA, which is still as we sit here today the majority stockholder of ExitFlex USA, correct?" ( Id. 116:15-23.)

C. ExitFlex USA Now

A letter from Medvecky to counsel in this case states that after May 4, 2009, all hose production for ExitFlex USA stopped and that " Exit [SA] and ExitFlex [SA] still exist but the production is limited to spray tips and swivels. . . . Today, Marcel Leisi is retired. He is in his mid-eighties and in very poor health. The events of 2009 and 2010 were unavoidable and not of his choosing. He was forced out of his own company. I am hopeful that Marcel will not have to be involved with this case." (J.P. Flexibles & ExitFlex USA's Resp. to Pl.'s Interrogs. at 6.) On May 4, 2009, eighty percent of Exit SA shares were transferred to Polyhose India Private Ltd., with another twenty percent remaining with Leisi. ( Id. at 7.) On December 13, 2010, ExitFlex SA announced that Leisi had transferred complete ownership of the " ExitFlex Group" to Polyhose. ( Id. at 8.)

D. Clarification of JP Flexibles' and ExitFlex USA's Ownership

Although Medvecky stated at several points in his deposition that ExitFlex SA (the manufacturer) had an ownership interest in JP Flexibles and ExitFlex USA, he later filed an affidavit seeking to correct that testimony and instead affied that Exit SA in fact held the ownership interest he had previously attributed to ExitFlex SA. He first did so in an affidavit submitted with a surreply to Yanez's reply brief on his motion to change venue. (Aff. of Joseph Medvecky re: Surreply ¶ 7, Feb. 20, 2013, Docket No. 116 (" During my deposition taken on August 9, 2012 I unintentionally confused the two Swiss corporations while discussing ownership of J.P. Flexibles, Inc. and did not notice my mistake until asked to prepare an affidavit for this Sur-Reply." ).) He also did so in a later affidavit in support of JP Flexibles' motion for summary judgment before the Court, in which he states: " At all times relevant to this case, Exit SA was the sole shareholder of ExitFlex SA. At no time has ExitFlex SA, the entity that manufactures the Graco hose, owned any part of J.P. Flexibles, Inc." and that " [a]ny prior confusion as to the name of the Swiss corporation owning shares in J.P. Flexibles, Inc. was inadvertent on my part and corrected by me, through counsel, as soon as the mistake in prior testimony was realized." (Medvecky Aff. Docket No. 155 ¶ ¶ 15-17.)

III. THE HOSE

The hose in this case, ExitFlex SA part number WE24, was a quarter-inch hose rated up to 8,000 psi. (Medvecky Dep. 18:17-22.) Graco purchased the hose because it had developed paint spray system pumps that went up to 8,000 psi and needed hoses that could handle that same level of pressure. ( Id. 21:3-11.) Graco purchased the hose to use in such a high pressure paint spray system, which it sold to Midway and Midway installed at DMI. Angela Redlund-Spieker, a product safety and compliance engineer with Graco (Second Aff. of Scott M. Rusert, Ex. M (Dep. of Angela Redlund-Spieker (" Redlund-Spieker Dep." )) at 10:20-25, Feb. 26, 2014,

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Docket No. 177), explained that Graco makes fluid-handling equipment, which includes pumps and paint sprayers (Redlund-Spieker Dep. 12:15-22.) She explained that Graco sells its products through its distributor channels, selling to distributors and then the distributors go to the end users and sell the products to them directly, but it does not sell directly to end users. ( Id. 14:16-25.) Redlund-Spieker explained that Graco would sell the whole package of a spray system to a distributor such as Midway. ( Id. 17:22-18:8.) The paint system in question was a new product line released by Graco around 2002 or 2003. ( Id. 18:18-19:6.) Before this system, Graco had not purchased high-pressure hoses through JP Flexibles before, but had purchased them from other companies -- including hoses with ratings from 5,000 to 10,000 psi. ( Id. 20:3-16.) She explained her understanding of the process used to select the whip hoses for the high-pressure systems:

[T]he typical process for something like that would be is GRACO, we understand what our pressure rating is of our equipment, and we understand what type of diameter we want for that, and we know the type of material that we are -- common material to be pumped through this hose. So that gets us to our understanding of a pressure for a hose, a material compatibility for the hose and a diameter for it. And once we know that, we work with our purchasing department and they start looking at all of our hose suppliers to try to see if there is a hose that already exists out there that would work for our application. And if they identify a hose that one of our hose suppliers says is a good option for us, we usually get our hose suppliers any certifications or approvals that they have on their hose prior to that. Once we get it into GRACO, we do some verification or audit testing, usually involves a burst test and then we test it out. And if it meets all of our needs, then we would go ahead and use that hose.

( Id. 24:11-25:9.) She explained that the hose from JP Flexibles would have needed to meet their pressure requirements and burst pressure requirements: that it has " gone through some type of impulse testing that our suppliers put it through" and that it works physically. ( Id. 26:13-27:2.) She explained that Graco expects the supplier to do the impulse testing, but that Graco also has the capacity to do impulse testing at its own facilities, although its " preference is to always get that from our supplier." ( Id. 30:19-24.) Her staff did not recall Graco actually completing any testing for this hose, but rather recalled only looking at a summary sheet of testing done. ( Id. 34:24-35:13.) She explained that this testing is done " to get some baseline ideas and verify that that concept will work for us." ( Id. 35:19-36:3.) She also discussed a product qualification test that was done on the hose in August 2002, which tested to see if the hose could handle the pressure that Graco intended to use in its design, and stated that the hose had a rating of 8,000 psi, which was higher than their systems requirement of 7,250 psi. ( Id. 38:6-39:13.) She also reviewed records of ExitFlex SA certificates as to pressure ratings of the hose. ( Id. 44:1-16.)

At some point after Medvecky sent Graco a sample of the hose in July 2001 (Aff. of Scott M. Rusert, Ex. B, Jan. 27, 2014, Docket No. 159), Graco requested that JP Flexibles imprint several pieces of information onto the metal ferrule at the end of the hose (Medvecky Dep. 41:17-23.) Medvecky asked ExitFlex SA about it and, according to Medvecky, " they came up with this . . . I.D. ring which you could put whatever information permanently on the hose to identify it after it's been used."

Page 1023

( Id. 41:24-42:6.) Medvecky sent Graco a sample of a hose with the identification ring (" ID ring" ) as " our alternative to printing the information on the ferrule itself, which has a very limited print area," and suggested that the ID ring " be supplied on one end only, due to the fact that the hose is a relatively short length." (Rusert Aff., Ex. D.) Graco also asked Medvecky if its own warning label could replace the ExitFlex SA warning label on the hose, which ExitFlex SA agreed to do. ( Id., Ex. F; Medvecky Dep. 45:18-46:6.)

Graco's first purchase order for the WE24 hose was May 31, 2002, and January 23, 2006 was the last date Graco purchased the WE24 hose from JP Flexibles. (Medvecky Dep. 51:4-52:2, 64:10-15.) The last shipment of WE24 hoses ...


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