In New England Country Foods, LLC v. VanLaw Food Products, Inc., S282968 (April 24, 2025), the California Supreme Court held that California Civil Code section 1668 prohibits contractual limitation of liability provisions that either exculpate or limit a party's liability for intentional torts. Companies negotiating contracts and evaluating lawsuits involving California law will want to be familiar with this decision. It is particularly relevant to lawsuits alleging theft of intellectual property.
Background
The case arose out of a business dispute where a company that hired a contractor to manufacture and distribute one its products (barbecue sauce) alleged that the contractor attempted to reverse engineer its trade secrets (the recipe for the sauce) and then sell the product on its own to one of the company's biggest clients. The company holding the intellectual property asserted intentional tort claims against the contractor, such as tortious interference. The company sought both past and future damages, including all the profits it allegedly lost when the company's biggest client refused to renew their contract.
The contractor argued that a limitation of liability provision in their contract effectively barred such claims. That limitation of liability provision stated that neither party was liable to the other for lost profits or any indirect or consequential damages, and otherwise limited the parties' liability to the gross revenues earned from the sales of the product in the two years prior to the acts giving rise to liability.
The case was originally heard in federal court. While the trial court agreed with the contractor and found that the limitation of liability provision barred the claims, the Ninth Circuit certified questions to the California Supreme Court on whether California Civil Code section 1668 prohibited application of the limitation of liability provision under the circumstances.
California Civil Code section 1668 states that "all contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."
California Supreme Court Decision
The California Supreme Court held that contractual limitation of liability provisions are categorically inapplicable to intentional tort claims, regardless of the sophistication of the contracting parties. Notably, the court said its holding applies equally to limitation of liability provisions that completely exculpate the contracting party from liability and provisions that simply limit the contracting parties' extent of liability.
The Court's holding is specific to intentional tort claims (e.g., tortious interference, theft). For gross negligence claims, the Court previously made a similar ruling that section 1668 categorically bars the application of contractual limitation of liability provisions as well. See City of Santa Barbara v. Superior Court, 41 Cal.4th 747 (2007).
For ordinary negligence claims, the Court reiterated its prior holding in Tunkl v. Regents of University of California, 60 Cal.2d 92 (1963), which held that contractual limitations of liability for ordinary negligence may be prohibited if they affect the public interest as assessed under these six factors:
- The claim "concerns a business of a type generally thought suitable for public regulation."
- "The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public."
- "The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least any member coming within certain established standards."
- "As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services."
- "In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional fees and obtain protection against negligence."
- "Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents."
It is important to note that the Court said its analysis applies only to the extent the claims at issue involve a tort claim that arises under the law independently of the parties' contract. If the plaintiff alleges only a breach of a contractual duty, then limitations of liability provisions are not affected by section 1668. As such, the application of section 1668 will depend on the true substance of the claim alleged, and it will not be enough to use artful pleading to characterize ordinary contract breaches as intentional torts.
Impact
Parties negotiating contracts in California or applying California law will want to understand how this decision affects their ability to contractually allocate risk. This decision confirms that certain types of risk categorically cannot be allocated under California law, which is important for parties that are either seeking to limit their risk exposure or increase their protection. This decision also is important when parties are evaluating whether to agree to California choice-of-law provisions, especially when one of the contracting parties is not a California business.
For parties evaluating litigation, this decision may have a significant impact on the viability of tort claims between contracting parties. Many defense attorneys (and the trial judge in the case) cite limitation of liability provisions as an affirmative defense to all claims between contracting parties. However, because of section 1668, there are important limits to the enforceability of such provisions for claims arising under California law, especially to claims alleging common law torts, such as tortious interference, misappropriation, disparagement, or breach of fiduciary duty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
