Bloor v. Falstaff Brewing Corp., 76 Civ. 3231 (CLB).

• Decision Date: 06 July 1978
• Docket Number: No. 76 Civ. 3231 (CLB).,76 Civ. 3231 (CLB).
• Citation: 454 F. Supp. 258
• Parties: James BLOOR, as Reorganization Trustee of Balco Properties Corporation, Plaintiff, v. FALSTAFF BREWING CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

454 F. Supp. 258

James BLOOR, as Reorganization Trustee of Balco Properties Corporation, Plaintiff, v. FALSTAFF BREWING CORPORATION, Defendant.

No. 76 Civ. 3231 (CLB).

United States District Court, S. D. New York.

July 6, 1978.

COPYRIGHT MATERIAL OMITTED

Weil, Gotshal & Manges by Robert G. Sugarman, Joseph H. Weiss and R. Peyton Gibson, New York City, for plaintiff.

Dickerson, Reilly & Mullen by John H. Reilly, Jr., New York City, and Smathers, Symington & Herlong by John Mullenholz, Washington, D. C., for defendant.

FINDINGS AND CONCLUSIONS

BRIEANT, District Judge.

This action was filed July 21, 1976 to recover monetary damages for breach of contract. Plaintiff James Bloor is the Reorganization Trustee of Balco Properties Corporation, formerly named P. Ballantine & Sons ("Ballantine"). Defendant is the Falstaff Brewing Corporation ("Falstaff"), which on March 31, 1972 bought from Investors Funding Corporation ("IFC") the Ballantine brewing labels, trademarks, accounts receivable, distribution systems and other property, excepting only the Ballantine brewery.

The purchase agreement called for an immediate payment to Ballantine of $4,000,000.00 and royalty payments thereafter of $.50 to be paid on each barrel (31 gallons) of the Ballantine brands sold between April 1, 1972 and March 31, 1978. The contract contained a liquidated damages clause, calling for payments of $1,100,000.00 a year which were to be made in the event Falstaff "substantially discontinued the distribution of beer under the brand name `Ballantine'." The contract also required that Falstaff "use its best efforts to promote and maintain a high volume of sales" of the Ballantine brands.

This action arises out of defendant's alleged breach of these covenants by its substantial discontinuance of the Ballantine brands or its failure to use best efforts in their promotion, and also by its failure to pay any royalties whatsoever on sales of those brands after December 1975 and by its alleged underpayment of royalties before that date.

The contract is integrated and provides that it "shall be governed by and construed and enforced in accordance with the laws of the State of New York."

Defendant Falstaff has in turn counterclaimed against the plaintiff, alleging (1) a shortage in the cooperage (beer barrels, now universally made of aluminum) purchased from Ballantine: (2) the illegality and consequent uncollectibility of one of the accounts receivable purchased from Ballantine; (3) the invalidity of Ballantine's claimed ownership of the brand name "Munich"; (4) the moldiness and infestation of eleven carloads of bulk corn grits purchased from Ballantine as a part of the acquired inventory; and (5) Ballantine's fraudulent inducement and misrepresentation in the making of the original contract.

Jurisdiction in this action is founded on the diversity of citizenship of the parties, and is proper under 28 U.S.C. § 1331. Falstaff is a Delaware corporation, with its principal place of business in San Francisco, California; Balco Properties Corporation is a New Jersey corporation, with its principal place of business in New York City.

Trial was held before the Court without a jury on December 12, 13, 15, 19, 20 and 27, 1977. The post-trial briefs and submissions of the parties have been read and considered.

Beer

Some preliminary discussion of brewing, the brewing industry in America and some of its current vicissitudes, is essential to a proper understanding of this case.

Generically speaking, "beer" is the name given any alcoholic beverage made by the fermentation of extracts of various starchy materials, usually grains. The process was known, and was apparently independently developed, in ancient Babylon, Egypt and China, as well as in South Africa, where the Kaffirs made a species of beer from millet. In the Near East, barley was apparently the original grain used for beer. It was buried in pots to allow it to germinate ("malting") and then mixed with water and allowed to ferment through the action of air-borne yeasts. In essence the same process is still used today. All ancient beers contained various herbs to relieve the flatness and sweetness of simple beer. The use of hops for this purpose dates from the 10th century B.C., and is now almost universal. In English-speaking countries the presence or absence of hops originally distinguished beer from ale,¹ but both products now contain hops, and the term "ale" now merely denotes a product with a heartier and more robust flavor.

The Domesday Book (1086) records the existence of some forty-three cerevisarii (brewers) then found in England, but the distribution of a brewer's products nationally or internationally is largely a twentieth century, and in the United States specifically a post-World War II, phenomenon.² On the trial of this matter, experts testified that it was the exposure of American servicemen and women to the beers produced by the larger breweries under contract to the armed services that began the trend away from the many small, local or regional brewers, each of whom made their own beer with distinctive flavor, towards the few national brewers who produce beers essentially indistinguishable in taste and body.

The biggest single factor contributing to the decline of local and regional brewers has been the enormous market growth, with its consequent efficiency and economy of scale, recently experienced by the "nationals": Miller's, Schlitz, Anheuser-Busch, Coors and Pabst, with Pabst now holding only a precarious position relative to the other four. Although beer consumption in the United States has been rising at approximately 4% per year, the "nationals" have increased their sales by an average of 12% per year, with the difference coming largely out of the sales of the smaller, local and regional brewers. From 1956 to 1966 the nationals expanded their production capacity by some 5.5 million barrels; from 1966 to 1976 they expanded their capacity by more than 75 million barrels and each year produced beer at almost the full capacity constructed the previous year. The cost-effectiveness of full production is obvious, especially in light of the fact, testified to by Mr. Paul Kalmanovitz, Chairman of the Board of Falstaff, that the cost of the ingredients in any two brands of domestic beer is exactly the same, with the exception of coloring materials which might add 2 cents to the cost of a case of beer. It is estimated that by 1980 the nationals will have 80% of the beer market in the United States, a 24% increase over the share held in 1976.

There was expert testimony at trial concerning "general discussion" in the beer industry of the "predatory pricing practices" of the national brewers, although no formal court action has yet been filed against them. It was suggested that several of the nationals may have sold their product in areas, or generally, at a loss for extended periods in order to broaden their market and drive out competition. There is knowledgeable suspicion that some national brewers may have operated their entire malt beverage operations at a loss for these same purposes, while being supported by income from other operations. It is uncontested that the increases in the retail price of beer during the last ten years have lagged considerably behind rises in the cost of its ingredients and the labor to manufacture it.

Advertising has also been a major factor in the growth of the nationals and the decline of local or regional breweries. It was undisputed at trial that, except for "ales" generally and excluding a very few distinctive smaller brews such as Rolling Rock Beer (produced by Latrobe Brewing Co. in Pennsylvania) and Anchor Steam Beer, made in San Francisco since the Gold Rush, all beers appear to be relatively indistinguishable in taste for the average customer. "Image" apparently sells beer, the image of the beer in the marketplace, and the image projected by advertising, of the typical consumer of that brand.³

In 1961 it became lawful for the major sports teams to combine to sell network television rights to their games. In an event, such as Monday Night Football, a minute of advertising can cost approximately $100,000.00, with a typical advertising "package" for the whole event costing about $1,400,000.00. For the national brewers such advertising is efficient and inexpensive: they sell beer in the same geographic area covered by the television networks, and the cost of reaching an individual home only amounts to seven-tenths of a cent. The same cost factors make national network advertising unreasonably expensive for the local or regional brewer.

Coupled with these economic factors have been profound changes in the American public's tastes and beer-drinking habits. At the beginning of World War II, two-thirds of the beer consumed in America was drunk in licensed premises or purchased in draft from such premises: the beer bucket was still a familiar household utensil.⁴ Now only one-third of all beer is consumed in saloons and bars, and two-thirds is consumed at home. In addition, the taste preference of the American consumer has tended more and more towards clearer, lighter beers and away from "porters," "stouts," and distinctive heavy-flavored beverages. The phenomenal success of Coors Beer is partially attributable to Coors' lightness. In the 1960's several of the nationals, specifically Schlitz and Budweiser, reformulated their product to bring it more in line with current American tastes. Most recently, the brewing industry has been affected by a wave of "light" beers, beginning with Miller's Lite Beer. Falstaff has marketed its version, Falstaff 96 Beer, containing only 96 calories. In 1977 "light" beers accounted for about 7% of total industry production.⁵

The result of all these changes, and the smaller brewers' inability or failure to keep pace with them, has been the bankruptcy or elimination from the marketplace of many smaller...