Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Nev.: Beer distributor’s good faith/fair dealing claim survives, (Apr 28, 2017)

By Peter Reap, J.D., LL.M.

In an action brought by Nevada beer distributor Crown Beverages against out-of-state brewer Sierra Nevada Brewing Co., which included claims for violation of the Nevada liquor suppliers and wholesalers law by termination without good cause, Crown’s claim for breach of the implied covenant of good faith and fair dealing survived Sierra Nevada’s motion to dismiss. The federal district court in Reno determined that Crown’s allegations showed that the brewer could have acted in a manner that was unfaithful to the purpose of the parties’ agreement and that a special relationship existed sufficient to support tort liability for the claim. However, the distributor’s claims for intentional interference and for a declaratory judgment failed to survive (Crown Beverages, Inc. v. Sierra Nevada Brewing Co., April 26, 2017, Du, M.).

On October 26, 2016, Sierra Nevada sent Crown a letter indicating that Sierra Nevada wished to end the business relationship due to Crown’s "harassment and bullying tactics directed toward our employees" and asking Crown to "initiate discussions to sell [Crown’s] distribution rights." On November 3, 2016, Crown filed suit in state court, alleging violations of the Nevada liquor suppliers and wholesalers law, and other claims. Before the court was Sierra Nevada’s motion to dismiss the distributor’s implied covenant, intentional interference, and declaratory judgment claims.

Implied covenant of good faith and fair dealing. Under Nevada law, every contract imposes upon each party a duty of good faith and fair dealing in its performance and execution, the court noted. Damages may be awarded against a defendant that performs a contract in a manner that is unfaithful to the contract’s purpose or where a defendant deliberately contravenes the intention and spirit of the contract thus denying plaintiff’s justified expectations. Additionally, in rare and exceptional cases under Nevada law, a breach of the implied covenant may give rise to tort liability.

Crown’s allegations-including that Sierra Nevada breached the covenant by sending the two letters purporting to end the parties’ distribution agreement without notice, good cause, or opportunity to correct any deficiencies, and by disparaging Crown in the market-were sufficient to support a contract based claim for breach of the implied covenant of good faith and fair dealing, the court held. Crown’s allegations, if taken as true, showed that Sierra Nevada may have acted in a manner that was unfaithful to the purpose of the distribution agreement even as it attempted to comply with the requirements for terminating its relationship with Crown.

Furthermore, Crown alleged a sufficient basis from which a factfinder could conclude that this was a rare and exceptional case of "grievous and perfidious misconduct" that would support a claim for tortious liability. The Nevada Supreme Court expressly recognized the relationship between franchisees and franchisors to be among the special relationships in which tort liability may arise, the court observed. Moreover, Nevada’s alcohol regulatory scheme explicitly purports to "protect locally owned and operated business[s]" from "economic and coercive control by nonresident suppliers of alcoholic beverages." NRS § 597.190. Crown satisfied its pleading requirements by alleging bad faith acts on Sierra Nevada’s part in the context of a qualifying relationship.

Intentional interference with contract. Crown failed to state a claim for intentional interference with contract. Crown did not plead any facts that would permit the court to reasonably infer that Sierra Nevada intended to disrupt third-party contracts, rather than simply ending its own. While Sierra Nevada’s acts may have in fact affected third party contracts, Sierra Nevada was correct that damages resulting from its acts may be relevant to a calculation of damages for Crown’s statutory and breach of contract claims, rather than the basis for a separate tort.

Intentional interference with prospective economic advantage. Here, Crown simply alleged that it generally has prospective contractual relationships with customers in its territory. It alleged the same damages it alleged for the breach of contract claim, and again it did not allege any facts for the court to reasonably infer that Sierra Nevada intended to disrupt third-party business opportunities rather than simply end its relationship with Crown. Crown’s conclusory allegations did not permit the court to infer more than the mere possibility of misconduct.

Declaratory relief. Sierra Nevada’s declaratory relief claim was duplicative of its statutory and breach of contract claims, the court held. In evaluating the breach of contract claim the court would necessarily provide a judicial declaration about whether Sierra Nevada complied with the distribution agreement and relevant statutes. Therefore, this claim was also dismissed.

The case is No. 3:16-cv-00695-MMD-VPC.

Attorneys: Darren J. Lemieux (Lewis Roca Rothgerber LLP) for Crown Beverages, Inc. Janine C. Prupas (Snell & Wilmer, LLP) and Jeffrey Alan Zuidema (McDermott Will & Emery LLP) for Sierra Nevada Brewing Co.

Companies: Crown Beverages, Inc.; Sierra Nevada Brewing Co.

Cases: FranchisingDistribution NevadaNews