Watkins Inc. v. Chilkoot Distrib., Inc.

• Decision Date: 08 July 2013
• Docket Number: No. 11–3490.,11–3490.
• Citation: 719 F.3d 987
• Parties: WATKINS INCORPORATED, Plaintiff–Appellee v. CHILKOOT DISTRIBUTING, INC., a foreign corporation; Cecile Willick; Lili J. Willick; and Richard Willick, Defendants–Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

719 F.3d 987

WATKINS INCORPORATED, Plaintiff–Appellee

v.CHILKOOT DISTRIBUTING, INC., a foreign corporation; Cecile Willick; Lili J. Willick; and Richard Willick, Defendants–Appellants.

No. 11–3490.

United States Court of Appeals,

Eighth Circuit.

Submitted: Nov. 14, 2012.

Filed: July 8, 2013.

Kay Nord Hunt, argued, Minneapolis, MN, Bridget Ann Sullivan, on the brief, Golden Valley, MN, for appellant.

Dawn Christine Van Tassel, argued, Minneapolis, MN, David Fulton Herr, on the brief, for appellee.

Before MURPHY, BENTON, and SHEPHERD, Circuit Judges.

SHEPHERD, Circuit Judge.

Watkins, Inc. (“Watkins”) brought this diversity action seeking a declaratory judgment that it did not breach its contract with Cecile (“Cec”), Lili, and Richard Willick, doing business as Chilkoot Distributing, Inc. (“Appellants”). Appellants raised various legal and equitable counterclaims. In the initial round of litigation, the district court ¹ granted Watkins's motion for summary judgment, finding a later agreement had superseded the parties' initial contract, and dismissed all of Appellants' legal and equitable counterclaims. We reversed and remanded, concluding there was an issue of material fact regarding which of two possible contracts governed the dispute.

On remand, Watkins renewed its motion for summary judgment, arguing there was no breach regardless of which contract applied. The district court agreed, reentered summary judgment for Watkins, and again dismissed Appellants' equitable counterclaims. We now affirm.

I.

Watkins is a manufacturer of various personal care, household, and organic products. Watkins utilizes a direct-sales business structure, and in 1988 Appellants signed a “Dealer Agreement” (“the 1988 Agreement”) with Watkins to become sales associates in Canada. In 2006, Appellants signed another agreement with Watkins, called an “International Associate Agreement” (“the 2006 Agreement”). A dispute remains regarding whether the parties intended for the 2006 Agreement to supersede the 1988 Agreement,² but it is not relevant to the instant appeal.

Appellants were successful in their sales of Watkins products and also in recruiting new sales associates. These new recruits became part of Appellants' “downline,” an important source of revenue and product discounts for a Watkins sales associate.³ A particularly valuable member of Appellants' downline was an entity the parties refer to as the Lambert Group. ⁴ Beginningin the 1990's, the Lambert Group sold substantial volumes of Watkins insect repellent in Quebec.

Sales expanded further in the mid–2000's, when the Lambert Group began to explore distribution and sale of insect repellent to large, mass-market retailers in Quebec. Watkins policy generally prohibited sales associates from selling their product in self-service retail stores,⁵ a business Watkins handled directly. In 2006, however, Watkins granted the Lambert Group permission to sell Watkins insect repellent to any account headquartered in Quebec, including large retail chains. For the next few years, the Lambert Group sold substantial volumes of Watkins insect repellent to large retail accounts in Quebec. The Lambert Group remained a sales associate in Appellants' downline, so Appellants and other upline sponsors earned commissions equal to roughly 14% of the Lambert Group's gross sales, including sales to large retailers. Additionally, due to their high sales volume, the Lambert Group was able to purchase merchandise from Watkins at a steep discount (roughly 61% off retail price). As a result of the discount and the upline commissions, Watkins retained only 25% of the retail price of products sold by the Lambert Group.

By late 2008, Watkins determined that the arrangement with the Lambert Group and Appellants was financially disadvantageous, and Watkins sought to restructure the discount for the Lambert Group and the commissions to the Lambert Group's uplines. In correspondence with Appellants, Watkins said they would need to retain at least 35% of the retail sales price of products sold by the Lambert Group. Watkins suggested that Appellants and the Lambert Group could perhaps negotiate between themselves to come up with the difference. Watkins also suggested it might simply work with the Lambert Group directly. The record does not provide details of any subsequent negotiations between Appellants and the Lambert Group, and it does not appear that they reached an agreement to adjust the discounts or commissions.

In January 2009, Watkins removed the Lambert Group as a sales associate and changed its classification to “manufacturer's representative.” In this capacity, the Lambert Group continued to sell insect repellent to large retailers, but it reported directly to Watkins. As a result of this change, the Lambert Group was no longer a part of Appellants' downline, which meant Appellants were no longer eligible to receive commissions on the Lambert Group's retail sales.⁶ Watkins did offer to pay Appellants half of the commission they had previously received on the Lambert Group's sales for one additional year (through December 2009), and Appellants accepted these reduced payments.

In May of 2009, counsel for Appellants sent Watkins a letter regarding the Lambert Group's reclassification, which contained various allegations of breach of contract. Shortly after, Watkins filed suit in federal court in Minnesota, seeking a declaratory judgment that it acted within its rights. Appellants counterclaimed for breach of contract and various equitable remedies. The parties cross-moved for summary judgment, and the district court held (1) the 2006 Agreement superseded the 1988 Agreement, (2) Watkins did not breach the 2006 Agreement, and (3) Appellants were not entitled to equitable relief. Watkins, Inc. v. Chilkoot Distrib., Inc., Civil No. 09–1115 ADM/FLN, 2010 WL 3515671, at *3–6 (D.Minn. Aug. 31, 2010). The district court entered summary judgment in favor of Watkins. Id. at *6.

On appeal, we reversed the district court's first grant of summary judgment to Watkins. Watkins Inc., 655 F.3d at 803. We held that material issues of fact existed regarding which contract—the 1988 Agreement or the 2006 Agreement—governed the dispute, and we remanded the case for additional proceedings. Id. at 805–06. We expressed no opinion regarding the district court's other holdings, such as the dismissal of Appellants' equitable counterclaims. Id. at 806.

On remand, Watkins once again moved for summary judgment, this time arguing that regardless of which agreement applied, there was no breach of contract. The district court agreed and granted summary judgment to Watkins, holding that Watkins's reclassification of the Lambert Group did not breach either the 1988 Agreement or the 2006 Agreement. Watkins, Inc. v. Chilkoot Distrib. Inc., Civil No. 09–1115 ADM/FLN, 2011 WL 5008036, at *4–5 (D.Minn. Oct. 20, 2011). The district court dismissed Appellants' counterclaim for breach of contract, and also dismissed Appellants' equitable counterclaims. Id. at *5–6. Appellants now appeal the district court's second grant of summary judgment to Watkins.

II.

We review a district court's grant of summary judgment de novo, BancorpSouth Bank v. Hazelwood Logistics Ctr., LLC, 706 F.3d 888, 893 (8th Cir.2013), and we will affirm if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law,” Fed.R.Civ.P. 56(a). We review any findings of fact for clear error, Deal v. Consumer Programs, Inc., 470 F.3d 1225, 1229 (8th Cir.2006), and we view all facts and make “all reasonable inferences in the light most favorable to the nonmoving party,” BancorpSouth Bank, 706 F.3d at 893 (internal quotation omitted). Both parties agree that this diversity case is governed by the substantive law of Minnesota.

A.

In Minnesota, breach of contract requires that the non-breaching party “must show (1) formation of a contract, (2) performance by plaintiff of any conditions precedent to his right to demand performance by the defendant, and (3) breach of the contract by defendant.” Park Nicollet Clinic v. Hamann, 808 N.W.2d 828, 833 (Minn.2011). Here, the only issue is the third element—whether Watkins's reclassification of the Lambert Group constituted a breach of contract. Appellants argue that by removing the Lambert Group from their downline, Watkins breached either the 1988 Agreement or the 2006 Agreement. Watkins counters that regardless of which agreement governs, changing the status of the Lambert Group from sales associate to manufacturer's representative was not prohibited by either contract, and thus cannot be a breach.

We agree with Watkins. Appellants point to no portion of either agreement that prohibits Watkins from reclassifying a sales associate as a manufacturing representative. And Appellants have presented no law from the state of Minnesota, or any other authority, that persuades us they possess a cause of action for breach where, as here, the agreements are completely silent as to Watkins' authority to reclassify sales associates. Of course, Watkins may have other, business-related incentives to avoid reclassifying members of an associate's downline. Building a successful downline network likely takes years of effort and investment, and if a company gained a reputation as unfairly (if not illegally) depriving sales associates of their downline, presumably the company's ability to recruit new associates would suffer. But negative business implications aside, we cannot find any legal basis supporting Appellants' claim for breach.

Appellants argue Watkins's failure to protect the Appellants' downline, or “line of sponsorship,” constitutes a breach of the express terms of the 1988 Agreement.⁷ In particular, Appellants point to a provision in Watkins Corporate Policies & Procedures,⁸ titled “Changing Line of Sponsorship,” which states that “[a]ny changes in the line of sponsorship within a Central...