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Kaloti Enterprises7/8/2005
On certification from the court of appeals, we review a decision of the circuit court for Waukesha County dismissing an amended complaint filed by petitioner, Kaloti Enterprises, Inc. (Kaloti), against respondents, Kellogg Sales Company (Kellogg) and Geraci & Associates, Inc. (Geraci), for failure to state a claim. The court of appeals certified two questions that can be summarized as follows: (1) whether a duty to disclose facts arises between sophisticated parties to a commercial transaction where the parties have an established practice of doing business and the facts are material to a change in that practice of doing business; (2) whether Kaloti's intentional misrepresentation claim is barred by the economic loss doctrine.
Based solely on Kaloti's allegations, we conclude that Kellogg and Geraci had a duty of disclosure that they failed to satisfy, thereby providing a basis for Kaloti's intentional misrepresentation claim, and that under these circumstances, Kaloti's intentional misrepresentation claim was not barred by the economic loss doctrine. Therefore, we reverse the circuit court's dismissal of Kaloti's amended complaint, and we remand for further proceedings.
I. BACKGROUND
Kellogg is a wholly owned subsidiary corporation of Kellogg Company, Inc. Kaloti is a wholesaler of food products. Over several years, Kellogg and Kaloti entered into numerous transactions through Geraci, Kellogg's agent. In each transaction, Geraci approached Kaloti to sell Kellogg products. Geraci negotiated all elements of the transaction for Kellogg, including product specifics, price, delivery schedule, allowances and terms of sale. Geraci accepted purchase orders from Kaloti and processed these orders, which were ultimately accepted by Kellogg. Following the negotiation of each contract, Kellogg "drop shipped" its product directly to Kaloti. Fleming-Marshfield, Inc. invoiced Kaloti and collected for Kellogg. Kaloti then sold Kellogg's products.
Kaloti alleges that, through a series of such transactions, a practice of doing business arose among Kaloti, Geraci and Kellogg, and that Geraci and Kellogg were aware that Kaloti bought Kellogg's products to resell them "as a 'secondary supplier' to large market stores."
Kellogg Company, Inc. acquired Keebler Foods Company (Keebler). As a result of that acquisition, Kellogg changed how it marketed NutriGrain and Rice Krispie Treat products. Instead of marketing these products through distributors or wholesalers such as Kaloti, Kellogg decided to sell them directly to the same large market stores to which Kaloti sold Kellogg's products. Kaloti did not know of Kellogg's decision to begin direct sales.
On May 14, 2001, after Geraci knew that Kellogg had changed to a direct-sales mode of marketing, Geraci solicited an order from Kaloti. The order was a $124,000 "quarterly promotion order," for NutriGrain and Rice Krispie Treats. Because of their past dealings with Kaloti, Geraci and Kellogg knew that it would take Kaloti three months to resell this order. Kaloti intended to market this order as it had in prior instances, as a secondary supplier to large stores, and it relied on that market being open. Further, in soliciting and accepting Kaloti's order, Geraci and Kellogg knew that Kellogg's change in marketing scheme would deny Kaloti the market it had used in the past to resell Kellogg's products.
Kellogg delivered the order to Kaloti on June 1, 2001, and Kaloti paid for it. On or about June 14, 2001, Kaloti's major and usual customers notified Kaloti that they would no longer purchase products from Kaloti because Kellogg was selling directly to them.
On June 15,
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