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No Fraud in Undisclosed Energy Drink Knives

(CN) - An energy drink company cannot pursue a claim that its supplier hid the fact that a disgruntled employee had randomly placed utility knife blades in its product, a federal judge ruled.

The courtroom battle took shape last year when Protica sued iSatori Tehnologies over the over Hardcore Bullet energy-shot products.

Protica says iSatori sold its vial energy products under an exclusive agreement, and that iSatori violated noncompete provisions by selling its own energy product, Liquid Morph 45.

But iSatori's counterclaims tell a less ordinary story.

Protica allegedly failed to properly safeguard Hardcore Bullet vials at its production facility, allowing a disgruntled employee to randomly place utility knife blades into product containers.

The conduct allegedly drew a Food and Drug Administration recall and "destroyed the market" for the 2.9 ounce Hardcore Energize Bullet, which had allegedly been the top-selling health item in 7-Eleven stores in Canada.

ISatori says that Protica intentionally withheld information and unnecessarily exposed iSatori's reputation and business "to grave harm and substantial losses." including lost profits and market shares, with "severe and potentially irreparable damages to its reputation and goodwill."

Protica knew as early as February 2009 that utility knife blades were found in some of its products because of a different product recall, according to the counterclaims. That month, IDS Sports discovered a utility knife blade in a routine quality inspection of New Whey supplied by Protica.

Health Canada issued a warning in July 2009 against buying or using Hardcore Energize Bullet "because a vial of the product was subject to tampering" and a "foreign object" was inserted.

The same month, the FDA notified customers of Protica's voluntary recall and alerted consumers about the blades found in one vial of Hardcore Energize Bullet and IDS Sport's New Whey.

Last week, U.S. District Judge James Knoll Gardner dismissed iSatori's counterclaim for fraudulent concealment, finding that the company failed to show Protica had a duty to disclose.

"Absent a duty to speak or disclose, the concealment of certain facts cannot constitute fraud," Gardner wrote.

But a "normal business relationship between sophisticated commercial entities ... does not form the basis for such a relationship unless 'one party surrenders substantial control over some portion of its affairs to the other,'" he added, quoting precedent.

The Pennsylvania Supreme Court found in 1992 that "mere silence is not sufficient to prove fraud absent a duty to speak" and "[p]arties in a business arrangement are under no obligation to divulge information which may weaken their bargaining position."

"After expressly alleging that Protica's duty to disclose was 'separate and apart' from the parties' contract, iSatori fails to aver the alleged non-contractual basis for Protica's duty to disclose the February 2009 New Whey recall," Gardner wrote.

The court also found that Pennsylvania's economic loss doctrine bars iSatori's claim of fraudulent concealment.

Protica still faces other counterclaims for breach of contract and breach of warranty.

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