Petereit v. S.B. Thomas, Inc.

• Citation: 63 F.3d 1169
• Decision Date: 18 August 1995
• Docket Number: Nos. 192,193,s. 192
• Parties: Robert PETEREIT; Robert J. Nardello; Richard SanAngelo, Plaintiffs-Appellees, v. S.B. THOMAS, INC., Defendant-Appellant. Eric Carl AHLQUIST; David Lee Adkins; Richard Earl Desso; James Michael Lonergan; Anthony Frank Pitrone; John Alan Strasser; Wayne Blair Anderson, Plaintiffs-Appellees, v. S.B. THOMAS, INC., Defendant-Appellant. Dockets 93-9293, 93-9299.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1169

63 F.3d 1169

Robert PETEREIT; Robert J. Nardello; Richard SanAngelo, Plaintiffs-Appellees, v. S.B. THOMAS, INC., Defendant-Appellant.

Eric Carl AHLQUIST; David Lee Adkins; Richard Earl Desso;

James Michael Lonergan; Anthony Frank Pitrone;

John Alan Strasser; Wayne Blair

Anderson, Plaintiffs-Appellees, v. S.B. THOMAS, INC., Defendant-Appellant.

Nos. 192, 193.

Dockets 93-9293, 93-9299.

United States Court of Appeals, Second Circuit.

Argued Aug. 29, 1994.

Decided Aug. 18, 1995.

Robert A. Horowitz, Stamford, CT (Christopher M. Graham, Kelley Drye & Warren, of counsel), for defendant-appellant S.B. Thomas, Inc.

Paul Ruszczyk, Cheshire, CT (Dice, Maloney & Lenz, P.C., of counsel), for plaintiffs-appellees Robert Petereit, et al.

Richard S. Order, Hartford, CT (Kevin N. Reynolds, Updike, Kelly & Spellacy, P.C., of counsel), for plaintiffs-appellees Eric Ahlquist, et al.

Before: NEWMAN, Chief Judge, KEARSE, and CARDAMONE, Circuit Judges.

CARDAMONE, Circuit Judge:

This litigation is between a manufacturer and a number of its distributors in the State of Connecticut. The distributors are of course somewhat at the mercy of the manufacturer whose products they distribute. For that reason they might believe they stand in the shoes of a David challenging a Goliath. Yet, casting the instant suit in terms of the biblical story, the small entrepreneur against all odds taking on the large corporation, does not accurately reflect the reality of the relationship between the parties. The State of Connecticut has enacted a statute the aim of which is to balance the disparity in economic power between a manufacturer and its distributors. We must decide whether either the parties' contracts or the Connecticut statute affords the distributors the protection they seek from the manufacturer's economic decision-making.

Defendant S.B. Thomas, Inc. (Thomas) appeals from a judgment of the United States District Court for the District of Connecticut (Dorsey, J.) entered November 3, 1993 after

                an eight-day bench trial.  Thomas' decision to implement a plan to increase customer service frequency, which it has determined results in higher sales, generated this dispute between it and ten of its Connecticut distributors.  The plan involved rationalizing the hodge-podge of overlapping distributor territories that had developed over the years.  The district court found that Thomas' attempt to realign the distributors' territories breached oral agreements it had with the distributors providing for permanent territories.  In addition, the district court held that the realignment constructively terminated plaintiffs' franchises without good cause in violation of the Connecticut Franchise Act, Conn.Gen.Stat. Sec. 42-133e et seq.   It therefore issued a permanent injunction prohibiting Thomas from unilaterally altering the distributors' territories.  See Petereit v. S.B. Thomas, Inc., 853 F.Supp. 55 (D.Conn.1993).  For the reasons discussed below, we affirm in part, reverse in part, and remand
                

BACKGROUND

We set forth the facts that form the background of this litigation. Defendant Thomas manufactures baked bread products, including the well-known Thomas' English Muffins. Plaintiffs Robert Petereit, Robert J. Nardello and Richard SanAngelo (the Petereit plaintiffs) distribute Thomas products in Waterbury, Connecticut, and the surrounding area. Plaintiffs Eric C. Ahlquist, David L. Adkins, Richard E. Desso, James M. Lonergan, Anthony F. Pitrone, John A. Strasser and Wayne B. Anderson (the Ahlquist plaintiffs) perform the same function in the Hartford, Connecticut area. All have been distributors for long periods--ranging from 10 to 30 years.

As a young company expanding in the Connecticut market, Thomas initially contacted Pepperidge Farms distributors asking them to distribute Thomas' goods as well. In the mid-1970s, as sales of both companies grew, the Thomas and Pepperidge Farms routes were split apart. The "splitting" of routes continued at least until 1989 or 1990, when Petereit gave up his Pepperidge Farms route. Due in part to the distributors' right to sell their Pepperidge Farms routes, but not their Thomas routes, many decided to continue as Thomas distributors. Thomas distributors now distribute only that company's products.

A prospective distributor usually began its business relationship with Thomas by a meeting with a district or regional sales manager. At such a meeting the Thomas representative would lay out the terms of the proposed business relationship. In these early informal years, the distributor would begin delivering product within days of the meeting; in some cases, he might have already started distributing Thomas products in the days immediately before the meeting. It was defendant's business practice to have the sales manager send a letter to the distributor shortly after the meeting or the commencement of the distributorship to confirm the terms previously agreed upon. Thomas was able to introduce at trial such letters addressed to some, but not all, of the plaintiffs. Although brief, the letters comprehensively reviewed the important aspects of the manufacturer-distributor relationship. They specifically noted that the distributor's territory was not permanently assigned, and that distributor status depended upon satisfactory performance. The letters requested the distributor to call the Thomas representative if there were any questions or the letter was not clear.

As plaintiffs became Thomas distributors each was assigned specific accounts--generally large, high-volume chain food stores. In addition, plaintiffs were entitled to solicit other customers, usually smaller "Mom and Pop" grocery stores located in their area of operation. As a result of these imprecise territorial boundaries, some communities had multiple Thomas distributors and distributors' sales routes crisscrossed.

Chain food stores, which represent a significant portion of Thomas' sales, bargain with Thomas directly over arrangements such as price and the amount of shelf space afforded its products. These stores are billed by Thomas--based on sales records submitted by distributors--and pay Thomas directly. Smaller stores deal only with the distributors. Distributors are barred from selling Thomas' products to these accounts Defendant's sales representatives regularly accompany distributors on their sales rounds to give them advice on marketing and customer service, to help present new products, and set sales goals. Thomas' representatives also visit customers on their own to verify that fresh Thomas products are delivered and displayed properly. All of the products are marketed under the Thomas name, brand, trademark, and packaging. Defendant devises all advertising, merchandising programs and promotions, which require distributors' implementation, participation and expense.

for less than the price paid by chain stores or for more than the retail price printed on the product.

When a distributor's territory is small, both Thomas and the distributor have an interest in its growth. But this coincidence of interests diverges as a distributor grows larger. Growth benefits both, but each has a different approach as to how best to achieve it. Thomas believes increased frequency of service results in increased sales. Thus, it focuses on having its distributors call on each customer more often. The best way to increase customer calls, it postulates, is to lessen the distance each distributor must travel, either by shifting stores among distributors or by creating new routes from stores originally serviced by other distributors; that is, distributors' territories should be made geographically more compact. The distributors agree that increased service helps sales, but they think the best way to increase sales is to enlarge their territory. They prefer more store locations added to their territories and are unhappy at the prospect of losing larger, more distant customers for smaller, closer ones in the name of efficiency.

It is Thomas' realignment of routes that is the subject of the litigation before us. In early 1993 the manufacturer set out to restructure many of the districts in its Northeast Region. It determined that sales in the Waterbury area could be augmented by realigning routes among the Petereit plaintiffs; in the Hartford area the plan called for realigning routes and creating two new routes from the stores serviced by the Ahlquist plaintiffs. Thomas attempted to minimize any negative impact of this realignment by simultaneously rolling out its new Sandwich Size English Muffins, for which it projected heavy sales.

Defendant announced the realignment at a sales meeting on April 14, 1993, to be effective April 26, 1993. The Petereit plaintiffs' territories were realigned as follows: three sub-distributorships, operated under Nardello (for which he received a 4 percent commission as opposed to the 19 percent commission on territory for which he served as a distributor), were to be elevated to full distributorships and operated by the current sub-distributors; Nardello would gain four stores from Petereit, including two major chain supermarkets, and Petereit would gain four independent markets; SanAngelo would lose one store to another distributor, not a party to the litigation. The Ahlquist plaintiffs experienced a similar shifting of territories, and two new routes were carved out from accounts several of them serviced.

A few days before the effective date of the realignment, the Petereit plaintiffs brought the instant suit to enjoin defendant from implementing the changes. The parties agreed to stay the realignment pending the outcome of this litigation. On April 27, 1993 the Ahlquist plaintiffs sued in Connecticut Superior Court to enjoin the realignment, which had become effective the day before, and for damages resulting from it. Thomas removed the case to the district court. At the bench trial held in July, 1993,...