Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Asset purchaser’s contract claim against Jim Beam proceeds, (Jun 8, 2016)

By Michael Menzhuber, J.D., LL.M.

Claims that Jim Beam Brands, Co. breached an asset purchase agreement with another beverage alcohol company by providing inaccurate shipment and net sales figures in its letter of intent may proceed, the federal district court in Chicago has ruled. The court also denied Beam’s counterclaim alleging breach of the parties’ transition services agreement (Luxco, Inc. v. Jim Beam Brands, Co., June 6, 2016, St. Eve, A.).

On January 18, 2013, Beam and Luxco, Inc. executed an asset purchase agreement (APA) under which Luxco would acquire the exclusive right to sell 13 of Beam’s "tail brands" (lower profit margin brands) of alcoholic beverages. The following day, the parties executed a transition services agreement (TSA) which provided that Luxco would pay Beam a "true-up amount" if the actual volume of each product that it ordered from Beam was less than the agreed-upon target volume amount.

Prior to the execution of the APA, Luxco learned that Beam would be reformulating certain vodka brands and was told that 75 complaints had been received about the reformulated brands. Luxco was also informed, during the ten-day due diligence prior to APA closing date, about other negative market reaction to the reformulated products.

As part of its letter of intent, Beam provided Luxco with a Brand Detail Sheet that reported, by brand, the total shipment cases, net sales, gross profit, brand investment, and brand contribution for a designated period. Beam did not turn over copies of its distributor agreements and, in response to Luxco’s request to identify its retail account incentives/programs by brand and retailer, informed Luxco that no incentives or brand incentive dollars went toward tail brands. After the execution of the APA, Luxco discovered that Beam was financing distributors, through the use of entity grants and local marketing funds (LMF), to use the Acquired Brands as free goods to induce the sales of Beam’s other brands.

Luxco filed a two-count breach of contract claim against Beam involving express warranties set forth in the APA. Beam filed a motion for summary judgment as to the breach of contract claims and its breach of contract counterclaim.

The court denied Beam’s summary judgment as to Count I, after find that: (1) the express warranty in Section 3.14 of the APA was a bargained-for contractual term in which Luxco bought Beam’s representation that the shipped cases and net sales stated in Schedule 3.14 were accurate and complete; and (2) Luxco presented evidence raising issues of material fact that Beam breached the express warranty by providing inaccurate and incomplete shipment and net sales figures.

The court granted Beam summary judgment as to Count II. Luxco argued that Beam breached the express warranty of Section 3.13 of the APA, which warranted that no "material adverse effect" had occurred during the period designated because of the market’s rejection of Beam’s reformulated vodka products. The court found for Beam because Luxco was aware of the market’s rejection of the reformulated vodka products.

Beam’s breach of contract counterclaim was based on Luxco’ failure to pay the "true-up amount" required by the TSA. Luxco did not dispute the amount but argued that Beam’s breach of the express warranties in the APA excused its performance under the TSA because the contracts should be construed together. Since Luxco offered evidence raising a genuine issue of material fact as to whether the parties intended the APA and the TSA to be construed together, the court denied Beam’s motion for summary judgment.

The case is No. 14 C 0349.

Attorneys: Michael R. Annis (Husch Blackwell LLP) for Luxco, Inc. Gretchen Vetter Scavo (Winston & Strawn LLP) for Jim Beam Brands Co.

Companies: Luxco, Inc. Jim Beam Brands Co.

Cases: FranchisingDistribution IllinoisNews