Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—8th Cir.: $11.75 million jury verdict against Jägermeister vacated for flawed community of interest jury instruction, (Nov 12, 2024)

By Justin Marcus Smith, J.D.

The focus of the community of interest test is on whether the franchisee’s investments are substantially specialized to the franchisee’s business, in the context of the franchise, as distinguishable from investments made in an ordinary vendor-vendee relationship.

A jury instruction affecting a $11.75 million verdict in favor of Major Brands, Inc. (Major Brands) against Mast-Jägermeister US, Inc. (Jägermeister) did not adequately define the community-of-interest requirement of a franchise relationship, held the United States Court of Appeals for the Eighth Circuit, in reversing a district court’s denial of the defendants’ motions for a new trial. The Eighth Circuit explained that an accurate assessment of whether a Missouri franchise involves a community of interest requires an inquiry that is not limited to the distributor’s investments in the supplier’s brand. Although economic dependence is not a separate element for finding a community of interest, it is perhaps the most important factor. It is a distributor’s substantial investments in a franchisor-supplier’s brands, investments which cannot be used outside the franchise relationship, that make a franchisee economically dependent on the franchisor with possible loss of tangible and intangible equities. In addition to reversing the district court’s denial of a motion for a new trial, the Eighth Circuit vacated the jury verdict and remanded for a new trial, including a new trial on Jägermeister counterclaims (Major Brands, Inc. v. Mast-Jägermeister US, Inc., Nos. 22-2979 and 22-3067 (8th Cir. Nov. 8, 2024).

Background. After a jury returned its verdict in favor of Major Brands, a Missouri liquor wholesaler, Jägermeister and co-defendants Southern Glazer’s Wine and Spirits of Missouri, LLC and Southern Glazer’s Wine and Spirits, LLC (collectively, the Jägermeister defendants) moved for judgment as a matter of law or for a new trial and/or remittitur. The federal district court denied the motion. It concluded that the jury in this matter heard the evidence and was properly instructed on the applicable law. The court had previously held that in order for a franchise to exist between Major and Jägermeister under the Missouri Franchise Act, Jägermeister must have granted Major a license to use its “trade name, trademark, service mark, or related characteristic,” and there must be a “community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise...” Jägermeister argued that the parties’ relationship was nothing more than a traditional distribution relationship. It urged that Major Brands failed to establish a community of interest and a trademark license.

On appeal, the Jägermeister defendants raised numerous issues, including multiple challenges to jury instructions 13 and 14 about Missouri franchising law. The Eighth Circuit applied de novo review to the district court’s denial of judgment as a matter of law and abuse of discretion review to the court’s denial of a new trial.

Missouri franchising. The Eighth Circuit said it agreed with the Jägermeister defendants that the district court’s jury instruction 14 on “community of interest” was flawed. The court said the problem was that the district court did not instruct the jury to determine whether Major Brands made substantial investments that were not recoverable on termination, i.e., investments that would have little use outside the franchisee’s business. The Eighth Circuit said non-recoverable investments are the only types of investments that show a community of interest.

The Eighth Circuit noted that courts often refer to New Jersey and Wisconsin law to interpret Missouri franchise law because the three states share similar statutory definitions. In this case, a Third Circuit two-part test was on-point. Cooper Distributing Co. v. Amana Refrigeration, Inc., 63 F.3d 262 (3d Cir. 1995). In Cooper, the Third Circuit used the Supreme Court of New Jersey’s explanation that a community of interest arises from substantial investments in goods or skills that are of little use outside the franchise. The Seventh Circuit reached a similar conclusion. Frieburg Farm Equip., Inc. v. Van Dale, Inc., 978 F.2d 395, 399 (7th Cir.1992). The Eighth Circuit said it adopted the Cooper and Frieburg tests. Missouri Beverage Co. v. Shelton Bros., 669 F.3d 873 (8th Cir. 2012) (Shelton). The Missouri Supreme Court had not issued any countermanding opinion since Shelton.

The problem with jury instruction 14 was that it contained a significant omission, relative to the Cooper and Frieburg tests, to instruct the jury to determine whether Major Brands’ had made investments in the Jägermeister brand that it would not be able to use outside the franchise business. The Eighth Circuit said the distinction is important because it ensures that the franchise laws protect a higher level of financial interdependence than is typical of ordinary vendor-vendee relationships. The peculiarity of franchise relationships is that a true franchisee makes investments that are only valuable to it within the context of the franchise.

Verdict affected. The appeals court concluded further that instruction 14 affected Jägermeister defendants’ substantial rights because it misled the jury or had a probable effect on the verdict. The court explained that the parties spent a lot of time at trial addressing Major Brands’ investments, but instruction 14 “misstated Missouri law and improperly broadened the scope of Missouri’s statutory definition of a franchise.” Moreover, the error was prejudicial because it affected all claims submitted to the jury, including incorporation of definitions into instruction 13, the verdict director instruction on the franchise claim. Instruction 13 was then incorporated into other jury instructions. The court said the error was therefore serious enough to require vacatur and remand for a new trial on all claims and inseparable counterclaims.

Missouri distribution. The court also disagreed with Major Brands’ argument that economic dependence required consideration of all of a distributor’s investments in violation of Missouri’s three-tier liquor distribution system. The Missouri three-tier system makes wholesalers like Major Brands an independent middle tier. The court observed that the three-tier system only prohibited financial interests in a member of a different tier. It did not require complete independence, and some dependence is inherent in any supplier-distributor relationship.

The community of interest required to qualify as a Missouri franchise relationship is based on exertion of economic control rather than financial interest. The court said this interpretation of the Missouri Franchise Act “bolsters the independence of the three tiers by ensuring that distributors are protected from abusive pressures.”

Franchise definition. On its cross-appeal, Major Brands acknowledged that the Eighth Circuit has explicitly rejected the argument that the district court erred by requiring Major Brands to meet the general definition of franchise in Mo. Rev. Stat. § 407.400(1) and the franchise definition specific to liquor wholesalers in § 407.413. See Shelton. Major Brands did not cite any superseding law.

Other arguments. The court declined to consider other arguments the Jägermeister defendants raised on appeal about alleged evidentiary and additional instruction errors. The court explained these issues were likely to arise again on vacatur and remand for a new trial, and the court did not want to issue an advisory opinion here.

The Case is Nos. 22-2979 and 22-3067.

Judge: Loken, J.

Attorneys: Derick C. Albers (Lewis Rice LLC) for Major Brands, Inc. Lawrence C. Friedman (Thompson Coburn LLP) for Mast-Jagermeister US, Inc.

Companies: Major Brands, Inc.; Mast-Jagermeister US, Inc.

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