723 F.2d 512 (7th Cir. 1983), 82-2391, Canada Dry Corp. v. Nehi Beverage Co., Inc. of Indianapolis

Docket Nº:82-2391.
Citation:723 F.2d 512
Case Date:December 02, 1983
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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723 F.2d 512 (7th Cir. 1983)

CANADA DRY CORPORATION, Plaintiff-Appellant,



No. 82-2391.

United States Court of Appeals, Seventh Circuit

December 2, 1983

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[Copyrighted Material Omitted]

Argued May 25, 1983.

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Henry J. Price, Barnes & Thornburg, Indianapolis, Ind., for plaintiff-appellant.

Terrill D. Albright, Baker & Dainels, Indianapolis, Ind., for defendant-appellee.

Before WOOD and CUDAHY, Circuit Judges, and WYATT, Senior District Judge. [*]

CUDAHY, Circuit Judge.

Plaintiff Canada Dry Corporation ("Canada Dry"), a franchisor of "Canada Dry" soft drinks, appeals from the portion of a judgment based on several jury verdicts in favor of its former franchisee, the Nehi Beverage Company of Indianapolis ("Nehi"). The verdicts appealed by Canada

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Dry are for breaches of contract, illegal discrimination among franchisees in violation of the Indiana Deceptive Franchise Practices Act, IND.CODE Sec. 23-2-2.7-1, et seq. (1976), and for compensatory and punitive damages. Nehi has not appealed verdicts for Canada Dry on Canada Dry's claims for trademark infringement and amounts owing on account. We have jurisdiction on the basis of Canada Dry's claim for trademark infringement, 28 U.S.C. Sec. 1338(a), and diversity of citizenship, 28 U.S.C. Secs. 1291, 1332. We affirm the judgment for Nehi on the breach of contract claims and the award of compensatory damages based on those claims and reverse the illegal discrimination verdict and damages based on it and the award of punitive damages.


In 1968, Canada Dry entered into a licensing agreement with Nehi, which gave Nehi the right to manufacture, bottle, sell and distribute "Canada Dry" soft drinks in certain specified market areas. This agreement remained in effect until September 12, 1974, when Canada Dry notified Nehi that it intended to terminate the agreement, effective as of December 20, 1974. Nehi then sued Canada Dry for wrongful termination. The details of this first lawsuit are unimportant in this appeal, except insofar as its settlement gave rise to a new agreement. The subsequent termination of this second agreement is the subject matter of this case.

The parties entered into the agreement in controversy on October 28, 1977. It contained the text of the original contract with substantial amendments, including, inter alia, provisions expanding Nehi's sales "territory" to include, on a conditional basis, Galveston and Lafayette, Indiana, permitting Nehi to market ginger ale as a soft drink (pending "further review" in conjunction with Canada Dry) and providing for investment by Nehi in bottling glass, division of advertising and promotion expenses and the establishment of marketing goals.

Disputes under the new agreement developed almost immediately. One problem area was the marketing of ginger ale as a soft drink. 1 In December, 1977, Canada Dry presented Nehi with a detailed soft drink marketing program, under which Canada Dry would underwrite half of the first year media expenses and reimburse Nehi at a rate of $.15 per case on promoted sales. The parties, however, were not able to agree as to when the program should be initiated, and the program was never implemented. Another area of dispute involved the Lafayette and Galveston territories. Nehi complained that Canada Dry failed to prevent its prior distributors from competing with Nehi in the Lafayette and Galveston territories during 1978. The parties also disagreed as to whether Nehi had complied with the agreement's provisions concerning Nehi's rights to this territory. Although the contract required Nehi to exercise an option in writing by December 15, 1978, in order to make its acquisition of the Lafayette and Galveston territories permanent, Nehi failed to exercise its option. Canada Dry did not, however, object to continued sales by Nehi in the territories, and, on November 8, 1979, retroactively extended Nehi's right to the Galveston and Lafayette territories for a nonrenewable one year term, which was to expire on February 28, 1980. Finally, there was also substantial controversy over Nehi's compliance with Canada Dry's quality standards.

Citing numerous alleged breaches of the franchise agreement, Canada Dry filed this suit on April 18, 1980, seeking damages for breach of contract, trademark infringement on account of Nehi's continued activity in the terminated Lafayette and Galveston territories and for amounts owing on account. Nehi counterclaimed, seeking compensatory and punitive damages for breach of the agreement, violation of the Indiana Deceptive Franchise Practices Act,

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Ind.Code Sec. 23-2-2.7-1, et seq., and tortious breach of contract.

Canada Dry terminated the entire agreement prior to trial of this action after an inspection on September 2, 1980, revealed yeast contamination in Canada Dry ginger ale stored at Nehi's warehouse. Plans for sanitization of the plant were cancelled. The termination was effective September 3, 1980.

A sixteen day jury trial on Canada Dry's claims and Nehi's counterclaims commenced on September 15, 1981. By agreement of the parties, United States Magistrate Gene B. Lee presided. After all the evidence was presented, Canada Dry moved for a directed verdict on each of Nehi's claims for compensatory and punitive damages. This motion was denied, and the case was submitted to the jury. The jury returned six separate verdicts. The jury: (1) awarded Nehi $100,609.01 compensatory damages on its breach of contract claim; (2) awarded $25,000 to Canada Dry for trademark infringement; (3) awarded $8,640 to Canada Dry for amounts owing on account; (4) awarded $200,000 to Nehi on its claim of unlawful discrimination under the Indiana Deceptive Franchise Practices Act, IND.CODE Sec. 23-2-2.7-2(5); and (5) awarded punitive damages of $300,000 to Nehi. Canada Dry appeals verdicts (1), (4), and (5). We uphold the jury's finding of liability on the part of Canada Dry for breach of contract and its award of compensatory damages. We disapprove Magistrate Lee's denial of Canada Dry's motion for a directed verdict on Nehi's discrimination claim and disapprove the award of punitive damages on the breach of contract claim.


Breach Of Contract Claims

The jury awarded approximately $100,000 to Nehi for damages resulting from Canada Dry's wrongful breaches of the franchise agreement. Nehi asserted at trial that Canada Dry breached its contractual duties by terminating the franchise and by failing to implement a soft drink program with Nehi. Recognizing that our standard of review of a jury verdict is one of deference, 2 we turn to a consideration of the various claims raised by the parties.

  1. Performance Deficiencies

    Canada Dry cites fourteen discrete breaches of the franchise agreement for the purpose of showing that it was justified in terminating Nehi's franchise. The alleged breaches include: Nehi's use of sweeteners not approved by Canada Dry; the failure of Nehi to remove chlorine satisfactorily from its water supply; Nehi's use of syrups beyond the syrups' expiration date; Nehi's failure to run tests for yeast contamination; discovery of yeast contamination in Canada Dry products stored in Nehi's warehouse; failure of Nehi to monitor the quality of Canada Dry tonic water; undercarbonation of Canada Dry ginger ale; failure by Nehi to send product samples to Canada Dry; the inability of Nehi's quality control manager, Charles Harden, to carry out procedures mandated by Canada Dry; Nehi's decision not to produce the Canada Dry beverages, "Hi-Spot" and "Tahitian Treat"; Nehi's failure to produce 10-ounce products or to install a rinser machine needed to do so; certain unauthorized syrup exchanges between Nehi and other Canada Dry bottlers; use of Royal Crown bottle crowns by Nehi, which indicated that the product was bottled by the Royal Crown Cola Company of Chicago; and Nehi's failure to mark its delivery trucks with Canada Dry decals. Claiming that Nehi's "admitted or undisputed performance deficiencies" were in violation of the franchise agreement, Canada Dry asserts that any one of Nehi's breaches was sufficient grounds to justify termination of the agreement. Canada Dry claims that these deficiencies, as a whole, indicate that Nehi both "repudiated" the franchise agreement and, indeed, never intended to comply with it.

    Nehi responds with an extensive series of citations to the record demonstrating conflicting testimony or evidence introduced at

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    trial on each point. Further, Nehi asserts that the jury could have found any or all of the breaches enumerated by Canada Dry to have been immaterial and thus not sufficient justification for terminating the entire agreement.

    We conclude after reviewing the evidence that there was sufficient dispute concerning each of the asserted breaches of the franchise agreement that a jury could have reasonably concluded that these alleged breaches were not material and did not justify termination of the franchise agreement. The materiality of a contractual breach is a question of fact reserved for the jury. Sahadi v. Continental Illinois National Bank and Trust Co. of Chicago, 706 F.2d 193, 196 (7th Cir.1983); Hensley v. E.R. Carpenter Co., 633 F.2d 1106, 1110 (5th Cir.1980); E. Farnsworth, CONTRACTS, Sec. 8.16 (1982). Magistrate Lee properly instructed the jury as to materiality. Instruction No. 18 stated that "once one party commits a material breach of an agreement, the other party may be excused from any further obligations under it." Instruction No. 19 explained the factors which the jury should consider in determining the materiality of a breach. 3 We reject Canada Dry's argument that we should find that certain of the breaches...

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