Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.Va.Sup.Ct.: Distributor’s failure to make timely payments justified termination, (Nov 12, 2013)

By Linda O’Brien, J.D., LL.M.

An exclusive alcoholic beverage distribution agreement was properly terminated under the West Virginia beer distribution law for the distributor’s failure to timely pay invoices for merchandise received, the Supreme Court of Appeals in West Virginia has ruled. (North Central Distributors, Inc. v. Moats, November 8, 2013, Benjamin, B.).

North Central Distributors, Inc. (NCDI) sells wine, beer, and non-alcoholic beverages in West Virginia. In 2002, Alcohol Beverage Control Commissioner Ronald Moats (Commissioner) approved a distribution agreement between NCDI and Labatt USA Operating Company, LLC (Labatt), a brewer and supplier of alcoholic beverages, which gave NCDI exclusive rights to distribute Labatt products in designated counties. In 2006, following a corporate merger, Labatt became InBev USA. Thereafter, NCDI and Labatt executed a second distribution agreement. The 2006 agreement provided that (1) Labatt would invoice NCDI electronically, (2) NCDI’s payment was due on the date Labatt’s shipment was received by NCDI, and (3) payment was to be made by electronic funds transfer. Labatt could terminate the agreement immediately for NCDI’s failure to pay any account when due.

In four instances in 2010, Labatt attempted to secure payment for delivered goods and the electronic funds transfer could not be completed for insufficient funds in NCDI’s account. Labatt sent two breach of distribution agreement letters to NCDI, demanding payment, and notified the Commissioner of its intent to terminate its 2002 agreement with NCDI. Six months after Labatt sent the letters and notified the Commissioner, NCDI paid Labatt for all outstanding invoices. At an administrative hearing before the Commissioner, NCDI claimed that it was Labatt’s customary practice to (1) send advance notice of electronic fund transfers and (2) where a shipment contained damaged goods, issue a revised invoice showing a credit for damaged goods before payment was due. The Commissioner concluded that NCDI had materially breached the distribution agreement for failure to timely pay invoices and terminated its agreement with Labatt. NCDI appealed to the circuit court, which subsequently affirmed the Commissioner’s order.

NCDI argued that the circuit court applied a wrong standard of review of the Commissioner’s order under the West Virginia beer distribution law and should have determined whether the termination of the distribution agreement was without due regard for the equities and without just cause. NCDI also claimed that its failure to timely pay Labatt was justified by Labatt’s usual and customary practice to send advance notice of electronic fund transfers and revised invoices before payment was due.

In affirming the circuit court’s order to uphold the termination of the distribution agreement, the court found that NCDI did not act reasonably or justifiably by withholding payments for six months based on the parties’ usual and customary business practices. Additionally, Labatt’s decision to terminate the agreement was based on legitimate business interests, including the ability to timely collect substantial amounts owed on account. Thus, the circuit court did not clearly err in concluding that the termination of the agreement was with due regard for the equities of NCDI.

The court also held that Labatt had just cause to terminate the distribution agreement, which specifically stated that (1) timely payment was essential to the agreement, (2) failure to timely pay constituted a material breach, and (3) failure to pay authorized Labatt to terminate the agreement automatically and without notice. Finally, the court concluded that Labatt’s written notice of termination addressing the 2002 agreement was adequate written notice to NCDI of Labatt’s intent to terminate the 2006 agreement even though it was the only agreement in effect at the time the notice was filed. Labatt’s notice of termination identified the breaching conduct, referenced the contractual remedy, and defined an opportunity to cure which met or exceeded the statutory requirements that the affected party receive “written notice of such cancellation, termination or rescission.”

The case is No. 12-0844.

Attorneys: Jeffrey M. Wakefield (Flaherty Sensabaugh Bonasso PLLC) for North Central Distributors, Inc. Harden C. Scragg, Jr. for West Virginia Alcohol Beverage Control Commissioner, Ronald M. Moats. David Allen Barnette (Jackson Kelly PLLC ) for Labatt USA Operating Company, LLC.

Companies: North Central Distributors, Inc.; Labatt USA Operating Company, LLC

Cases: FranchisingDistribution WestVirginiaNews