Beer Industry Fair Dealing Act – Case Offers Some Insight on Termination

It’s Thursday here at Libation, so you know what that means… another exciting edition of the Illinois Beer Industry Fair Dealing Act Thursdays. For those of you who are new to the Blog, the Illinois Beer Industry Fair Dealing Act is Illinois’ version of the plethora of states’ statutes that govern the relationship between brewers and distributors. Thursdays are when we examine some case or nuance involving BIFDA.

Today’s case is an interesting one. Leonel & Noel Corp. v. [the Intermediary Supplier] Import & Export – From the Northern District of Illinois.

In this case, an Illinois distributor sued a Guatemalan brewer and its “intermediary”, [the Intermediary Supplier], – who supplied the distributor with the brewers beer – along with the company that got the new distribution contract for, among other things, violations of BIFDA. You can see a copy of the operative complaint here. And, because the brewer was in Guatemala, we have a real treat, a Spanish translation of the operative complaint. There’s also a copy of the Sale and Distribution Agreement between the intermediary and the new distributor attached as an exhibit to an answer in this matter.

The Court’s opinion on a motion for summary judgment details the alleged facts in this matter. The Brewer’s importer, the Intermediary Supplier, basically entered into an agreement with another buyer/distributor who was to work with the Distributor and supply the beer that the Distributor used to get straight from the Intermediary Supplier.

[Distributor] is an Illinois corporation engaged in the business of importing and distributing food and liquor. [Distributor] is licensed to distribute beer in Illinois and several other states. [THE GUATEMALAN BREWER] produces beer in Guatemala, some of which is sold in the United States. Around 1990, [Distributor] began to distribute and sell [THE GUATEMALAN BREWER] beers in several states. Rather than purchasing beer directly from [THE GUATEMALAN BREWER], [Distributor] acquired [THE GUATEMALAN BREWER]’s products through an intermediary, [the Intermediary Supplier]. [Distributor] contends that [THE GUATEMALAN BREWER] asserts complete control over [the Intermediary Supplier]’s activities.

The relationship between [Distributor] and [THE GUATEMALAN BREWER]/[the Intermediary Supplier] proceeded smoothly until 2003. In late summer 2003, [THE GUATEMALAN BREWER] and/or [the Intermediary Supplier] entered into a “master license agreement” with [THE NEW DISTRIBUTOR]. [THE NEW DISTRIBUTOR] informed [Distributor] of the agreement in October 2003 and stated that, as a result, “[Distributor] will begin working directly with [THE NEW DISTRIBUTOR] for . . . product ordering.” Subsequently, [THE NEW DISTRIBUTOR] and [the Intermediary Supplier] allegedly requested that [Distributor] accept inferior terms, including reduced territories. [Distributor] agreed with the terms requested by [THE NEW DISTRIBUTOR] and [the Intermediary Supplier] in January 2004 but claims to have done so because [THE NEW DISTRIBUTOR] withheld an October 2003 order until [Distributor] acquiesced. From that point forward, [Distributor] was required to purchase [THE GUATEMALAN BREWER]’s beers from [THE NEW DISTRIBUTOR] rather than from [THE GUATEMALAN BREWER] or [the Intermediary Supplier]. [THE NEW DISTRIBUTOR] thus became a “middleman,” according to [Distributor]. …

[Distributor] alleges that [THE GUATEMALAN BREWER], [the Intermediary Supplier], and [THE NEW DISTRIBUTOR] immediately began planning to terminate [Distributor] in bad faith. …

[Distributor] contends that [THE NEW DISTRIBUTOR] exploited its position for its own benefit and to [Distributor]’s harm. That alleged conduct included artificially raising prices on [THE GUATEMALAN BREWER] beer, marketing beer in at least one state, Wisconsin, in which [Distributor] had exclusive distribution rights, imposing unattainable sales quotas, refusing to sell two of [THE GUATEMALAN BREWER]’s products to [Distributor], and lying to [Distributor] about whether [THE GUATEMALAN BREWER] was still brewing certain beers. [Distributor] contends that [THE NEW DISTRIBUTOR] took these actions as part of a plan to take over the markets for [THE GUATEMALAN BREWER]’s beers that [Distributor] had expended money and years of effort to develop. …

Effective December 31, 2006, [THE GUATEMALAN BREWER] and/or [the Intermediary Supplier] terminated [Distributor] as a distributor “in the states of Ohio, Minnesota, North Dakota, South Dakota, Wisconsin and Nebraska.” … [Distributor] contends that this was done in bad faith and without good cause. On January 15, 2007, [THE NEW DISTRIBUTOR] terminated [Distributor]’s distribution rights in Illinois, providing thirty days’ notice. [Distributor] contends there was no good faith basis for [THE NEW DISTRIBUTOR] to do so. [Distributor] filed suit against [THE GUATEMALAN BREWER], [the Intermediary Supplier], [THE NEW DISTRIBUTOR].

The case went to trial on some of the claims, including the BIFDA claims about termination. A jury awarded the Distributor damages and the Court’s opinion after trial on the Defendants motion to set the verdict aside offers some insight about terminating distribution agreements.

1. The Court’s opinion after trial is that it relies on the “Mend The Hold Doctrine” in finding that the defendants couldn’t change their defenses during the course of the litigation (or at trial) because they found new evidence that would support additional reasons to terminate the distribution agreements.

The Mend the Hold Doctrine’s name comes from a wrestling term (think Olympics, not WWE) for changing the grip on your opponent if it starts to fail. In legal terms, it’s a doctrine in contract actions (BIFDA claims are contract actions with a statutory overlay) that limits the ability of defendants who terminate agreements for one reason from arguing subsequent reasons for termination later on in the suit.

From the Court’s opinion:

“Under Illinois’ mend-the-hold doctrine, the defendant in a breach of contract suit may not change its defense in the course of litigation by citing a different ground for termination than the one on which it had relied.”

This is important because it’s a fair warning that in the letter campaign that usually precedes a lawsuit or the termination of a distribution agreement, people need to be sure that they’re getting each and every reason they may have for termination out into the open so they won’t be precluded from asserting them during the litigation.

2. The advance notice provisions of BIFDA have to be complied with – even if a brewer believes that there’s good cause for termination.

3. The Court in this case upheld a portion of the damages that were for sales outside of Illinois when a defendant challenged the award under the Commerce Clause of the U.S. Constitution. The Court found that BIFDA could be applied and used to pursue damages for sales outside of Illinois. “The fact that some part of [the Distributor’s] damages stemmed from sales that it made outside Illinois does not render the application of BIFDA constitutionally infirm.”

4. The “penalty” provision of BIFDA may result in punitive damages.