Mealey's (July 7, 2016, 3:41 PM EDT) -- CINCINNATI — A Sixth Circuit U.S. Court of Appeals panel on July 6 reversed a trial judge’s calculation of the diminished value of beer distributors’ business after a franchise agreement was terminated (Tri County Wholesale Distributors Inc., et al. v. Labatt USA Operating Co. LLC, et al., Nos. 15-3710/3769, 6th Cir.; 2016 U.S. App. LEXIS 12425).
(Opinion available. Document #98-160712-046Z.)
The panel reversed a ruling by U.S. Judge Algenon L. Marbley of the Southern District of Ohio, saying the profits that the distributors were projected to earn up to the date when the franchise agreements are actually terminated must be deducted from the value of their award.
The panel affirmed Judge Marbley’s grant of summary judgment to the defendant beer manufacturers on the distributors’ unfair termination claims.
Franchise Agreements
Tri County Wholesale Distributors and Iron City Distributing are distributors of alcoholic beverages in Ohio that entered into franchise agreements with a supplier, Labatt USA Operating Co. LLC. The agreement allowed the distributors to sell several brands of beer in their respective territories.
Labatt USA Operating is 100 percent owned and controlled by North American Breweries Holdings LLC through a series of holding companies. Before Dec. 11, 2012, the membership interests in NAB Holdings were owned by several investors (the KPS entities). On Dec. 11, 2012, the KPS entities sold their interests in NAB Holdings through a complex transaction that resulted in CCR American Breweries Inc. owning 100 percent of NAB Holdings.
On March 7, 2013, Tri County received a letter from CCR purporting to terminate Tri County’s right to distribute the brands supplied by Labatt USA Operating. On March 11, 2013, Iron City received a similar letter. The letters claimed that CCR was entitled to terminate the franchise agreements because CCR’s acquisition of NAB Holdings qualified under Ohio Revised Code Section 1333.85(D) as a transaction in which “a successor manufacturer acquire[d] all or substantially all of the stock or assets of another manufacturer through merger or acquisition,” which allows the successor manufacturer to terminate the franchise if it repurchases the distributor’s inventory and compensates the distributor for the “diminished value of the distributor’s business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer.”
The distributors responded by suing Cerveceria Costa Rica S.A. (the owner of CCR), Labatt USA Operating and NAB Holdings for a declaratory judgment stating that the franchises cannot be terminated under Section 1333.85(D) and an award of any damages resulting from the suppliers’ attempted termination of the franchises; in the alternative, a declaratory judgment stating that the suppliers may not terminate the franchises under Section 1333.85(D) because doing so would violate the takings clauses of the federal and Ohio constitutions; or, in the alternative, if the suppliers may terminate the franchises under Section 1333.85(D), the diminished value of the distributors’ businesses.
Diminution Of Values
Judge Marbley granted the suppliers judgment on the pleadings on the takings clause claim and summary judgment on the claim regarding the scope of Section 1333.85(D). The judge then held a bench trial to determine the diminished values of the distributors’ businesses. The judge determined that the diminution of values to Tri County and Iron City was $2,756,459 and $302,720, respectively.
The distributors appealed, raising four issues: whether the suppliers were entitled to terminate the franchises under Section 1333.85(D); whether the terminations, if allowed, violate the takings clauses of the federal and Ohio constitutions; whether the judge should have included in the distributors’ awards the net operating losses they were expected to incur after the termination of the franchises; and whether the judge should have relied solely on the distributors’ expert’s proposed capital structure in calculating the diminished value of the businesses.
In an opinion written by Circuit Judge Danny J. Boggs, the appeals panel said it agreed with Judge Marbley’s interpretation of Section 1333.85(D) and that the suppliers were entitled to terminate the franchise agreements. Citing Esber Beverage Co. v. Labatt USA Operating Co. (3 N.E.3d 1173, 1174 [Ohio 2013]), Judge Boggs said Section 1333.85(D) is clearly designed to provide successor manufacturers with the flexibility to “assemble their own team of distributors so long as the successor manufacturers provide timely notice and compensate those distributors who are not being retained.”
Judge Boggs wrote that even under the distributors’ interpretation of Section 1333.85(D), CCR could have terminated the franchises if it had only structured the transaction differently, by setting up a new entity that would then take control of the brands from Labatt USA Operating.
Takings Clauses
Judge Boggs wrote that the distributors’ argument that their franchises are property that has been taken for a solely private purpose in violation of the federal and Ohio constitutions fails because the takings clauses of the federal and Ohio constitutions deal with government takings of property.
Both parties agreed that Judge Marbley erred in calculating the diminished value of a distributor’s business under Section 1333.85(D). Judge Boggs said Judge Marbley was correct in denying the distributors the additional money equal to their projected net operating losses they sought.
“The problem with this argument is that the only reason the distributors would be having net operating losses after losing the brands is that they are no longer able to earn profits from them,” Judge Boggs noted. “But when the district court awarded the distributors the value of the lost brands, they received a sum of money equal to the discounted present-day value of the projected future profits from those brands.
“The district court’s award therefore compensates the distributors wholly for the ‘diminished value’ of their companies.”
Both parties criticized the discount rate each party’s experts used to determine the diminished value of the distributors’ business — the value of the lost brands. Judge Boggs said the appeals panel was not “left with a definite and firm conviction that a mistake has been committed” and affirmed Judge Marbley’s calculation of the discount rate.
Profits
The suppliers argued that Judge Marbley should have subtracted post-valuation-date profits from its calculation of the diminished value of the distributors’ businesses. The appeals court agreed.
“While this litigation was pending in the district court, the suppliers were not allowed to transfer the brands in question to new distributors,” Judge Boggs wrote. “Furthermore, after the court held the terminations valid and calculated the value of the brands, it granted the distributors’ motion for a stay pending appeal, which again prevented the transfer of the brands.
“The distributors have therefore been allowed to reap profits from the brands throughout the course of this litigation.”
Judge Boggs said awarding the distributors the present-day value of the franchise in addition to letting them keep post-valuation-date profits would give them a windfall.
“The distributors would be profiting from the brands for several years beyond the date on which the franchise agreements should have been terminated, and such profits are already included in the experts’ calculations of the ‘diminished value’ of the distributors’ businesses,” he wrote.
Circuit Judges Eugene C. Siler Jr. and Alice M. Batchelder concurred.
Counsel
David W. Alexander, Larry J. Obhof Jr. and Christopher F. Haas of Squire Patton Boggs in Columbus, Ohio, represent Tri-County. James B. Niehaus and Christopher C. Koehler of Frantz Ward in Cleveland represent the beer manufacturers.
(Additional documents available: Appellant brief. Document #98-160712-047B. Appellee brief. Document #98-160712-048B.)...