C. Pappas Co., Inc. v. E. & J. GALLO WINERY, CV F 83-296-EDP.

• Decision Date: 22 May 1985
• Docket Number: No. CV F 83-296-EDP.,CV F 83-296-EDP.
• Citation: 610 F. Supp. 662
• Court: U.S. District Court — Eastern District of California
• Parties: C. PAPPAS CO., INC., Plaintiff, v. E. & J. GALLO WINERY and McKesson Wine & Spirits Co., Defendants.

610 F. Supp. 662

C. PAPPAS CO., INC., Plaintiff, v. E. & J. GALLO WINERY and McKesson Wine & Spirits Co., Defendants.

No. CV F 83-296-EDP.

United States District Court, E.D. California.

May 22, 1985.

Dean A. Bailey, Stammer, McKinght, Barnum & Bailey, Fresno, Cal., D. Peter Harvey, Horning, Janin & Harvey, San Francisco, Cal., and Robert D. Paul, Richard A. Oetheimer, Goodwin, Procter & Hoar, Boston, Mass., for plaintiff.

Oliver W. Wanger, McCormick, Barstow, Sheppard, Wayte & Carruth, Fresno, Cal., Elliot S. Kaplan, John N. Love, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., and Wellesley, Mass., for defendant Gallo.

Nickolas J. Dibiaso, Steven M. McClean, David M. Gilmore, Thoms, Snell, Jamison, Russell & Asperger, Fresno, Cal., for defendant McKesson.

MEMORANDUM DECISION ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT.

PRICE, District Judge.

The defendants E. & J. Gallo Winery (hereinafter "Gallo") and McKesson Wine & Spirits Co. (hereinafter "McKesson") have filed a comprehensive motion for summary judgment.

FACTUAL BACKGROUND

Plaintiff C. Pappas Co., Inc. (hereinafter "Pappas") is a Massachusetts corporation engaged in the wholesale distribution of beer, wine and spirits. Since 1967 they have served as distributor of certain Gallo products in the State of Massachusetts, principally in the Boston area. All during that period of time the distributorship was operated by Pappas pursuant to a series of written contracts. The contract which is in issue in the instant case was entered into on December 1, 1976. It provided in pertinent part, insofar as these motions are concerned, the following covenants:

1. It was agreed that Pappas was to be a nonexclusive distributor.

2. Pappas was to use its best efforts to develop the full potential for, and diligently sell, distribute and promote such products (the specific Gallo products specified in the contract) in all licensed retail premises in the State of Massachusetts.

3. Nothing in the agreement limited or intended to limit the area in which Pappas could sell said products.

4. Nothing in the agreement was intended to give Pappas any exclusive rights within any part of any area described above.

5. The agreement was personal in nature, was not assignable, and could be terminated as to all or any products by either party giving thirty (30) days advance written notice to the other party.

6. The agreement was entered into under the laws of the State of California and was to be construed thereunder, and any cause of action arising between the parties, whether under this agreement or otherwise, was to be brought only in a court having jurisdiction and venue at the home office of the Winery.

All of the parties concede that the home office of Gallo is situate in Modesto, Stanislaus County, and in the Eastern District of California.

For several years preceding this action, the Court finds that Pappas was the only Gallo distributor in the Boston, Massachusetts area. Further, several years prior to the events leading to this litigation, other Gallo distributors operating in Massachusetts began incursions into the Boston area. The evidence is undisputed that the matter was discussed between the principals of Gallo and the principals of Pappas at that time, and it was explained to Pappas that Gallo could not prevent such incursions. Indeed, the evidence clearly demonstrates that the principals of Pappas understood at all times that they did not have an exclusive distributorship for any area in Massachusetts.

At some point after signing the 1976 Agreement, Pappas began to experience financial trouble. In order to solve their problems, Pappas sought to sell all or a portion of their business or its assets to other distributors. They negotiated with both McKesson and a company not a party to these proceedings known as Whitehall Company, Ltd. (hereinafter "Whitehall"). There is no evidence that Pappas sought any counsel from Gallo as to the acceptability of either prospective purchaser during the negotiations.

The negotiations with Whitehall culminated in the parties signing a letter of intent wherein Whitehall would purchase all or substantially all of Pappas' physical assets. Although neither party was unconditionally bound by the letter of intent, Whitehall took care to specify that their obligation under the letter of intent was expressly "conditioned and contingent upon our appointment by Gallo Wineries and its subsidiaries as a co-distributor of their products in Eastern Massachusetts." Apparently Whitehall did not, at this juncture, reveal to Pappas that in 1977 they had sought a distributorship from Gallo, which request was rebuffed.

Arrangements were made for Whitehall to visit with the Gallo principals in Modesto in January of 1982. In preparation for this meeting, Gallo had instructed a Gallo employee to make a survey of Whitehall's performance in the areas in which they operated in Massachusetts. On February 3, 1982, K.C. Bertsch, Gallo's Vice President-Director of Sales, wrote Whitehall indicating that Gallo would not appoint Whitehall as a distributor of Gallo products. The concluding sentence of the Bertsch letter is quite pointed: "If Whitehall were to attempt to assume all or part of the distribution responsibilities of C. Pappas Company with regard to the Winery's products, the Winery would exercise its contractual rights to terminate the Pappas distributorship and would not appoint Whitehall as a Winery distributor." A copy of this letter was simultaneously forwarded to Pappas with a letter addressed solely to Pappas expressing Gallo's displeasure at certain anticipated changes in their operation contemplated by Pappas. On June 16, 1982, Gallo entered into an agreement of distributorship with McKesson. The contract document entered into with McKesson is identical in text.¹

This litigation followed, being filed first in the United States District Court in Massachusetts. The matter was removed to this district on motion by Gallo. 565 F.Supp. 1015. After removal to this Court, McKesson's motion to intervene as a defendant was granted on June 30, 1984.

After discovery was undertaken by the parties in this action, Gallo came into possession of certain knowledge with reference to the contract entered into between Pappas and Whitehall which caused them to terminate Pappas as a distributor. Apparently the propriety of that termination is still in litigation in Massachusetts. The Court does not consider the termination as being material to any of the issues raised in either Gallo's or McKesson's motions, or in Pappas' response to the same, although the parties have referred to it in their moving and responding papers.

GALLO'S MOTION FOR SUMMARY JUDGMENT

Pappas' complaint consists of thirteen (13) counts. The Court will discuss each count separately.

Count I

Count I is a straight breach of contract count.

Reading Pappas' memorandum in opposition to Gallo's motion, it is Pappas' position that: First, Gallo owed an obligation to Pappas to appoint Whitehall as a distributor in Massachusetts in order to allow the proposed sale by Pappas to Whitehall to be consummated on the terms as originally contemplated;² and second, Gallo owed an obligation to Pappas not to appoint a second distributor in the Massachusetts area.

As pointed out above, the contract clearly contains a choice of law clause, and the choice of law is California. Plaintiff concedes that California law is applicable in this case.

It has been the law in California for many years that even an exclusive distributorship not for an agreed or specified term is terminable. See A.B.C. Distrib. Co. v. Distillers Distr. Corp. (1957) 154 Cal. App.2d 175, 316 P.2d 71; Alpha Distrib. Co. of Cal., Inc. v. Jack Daniel Distillery, 454 F.2d 442 (9th Cir.1972). Clearly then, a manufacturer has the right to insert a competing distributor in an area already occupied by a nonexclusive distributor. The extended reference in Pappas' opposing papers does not in any way change this fundamental rule.

Pappas argues that in this case, the "implied covenant of good faith and fair dealing" somehow overrules the foregoing precedent. None of the landlord-tenant cases cited by Pappas change the California law as applied to distributorship agreements. Indeed, the testimony of the Pappas' executives clearly demonstrates a clear understanding that Pappas' contract was neither exclusive nor assignable.

Count II

Count II of Pappas' complaint alleges that Gallo's actions constitute violations of the obligations of good faith and fair dealing in the performance and enforcement of contracts set forth in Sections 1-203 and 2-103(1)(b) of the Uniform Commercial Code.³

At the outset, it should be noted that California did not adopt the Uniform Commercial Code per se, but adopted its own version of the same. However, the sections referred to in Pappas' First Amended Complaint were adopted by the California legislature. See California Commercial Code § 1-203.

In approaching this subject in California, initially a distinction must be made between the above-cited provision of the California Commercial Code, which is an implied covenant in every contract, and the discussion in certain special relationship cases where the breach of such covenant may result in tort liability rather than merely a breach of contract. See Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141 (1979); Tameny v. Atlantic Richfield Co, 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330 (1980). Our focus here is only on the aspects of this covenant as it applies to the law of contracts. The limitations of the covenant are well explained in 1 Witkin Summary of California Law, 8th Ed., § 576, at p. 493:

"There is implied in every contract a covenant by each party not to do anything which will deprive the other parties thereto of the benefits of the contract.... This covenant not only imposes upon each contracting party the

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