Tri Cnty. Wholesale Distribs., Inc. v. Labatt USA Operating Co.

• Citation: 828 F.3d 421
• Decision Date: 06 July 2016
• Docket Number: Nos. 15–3710/3769,s. 15–3710/3769
• Parties: Tri County Wholesale Distributors, Inc.; The Bellas Company, Plaintiffs–Appellants/Cross–Appellees, v. Labatt USA Operating Co., LLC ; Cerveceria Costa Rica, S.A., North American Breweries Holdings, LLC, Defendants–Appellees/Cross–Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

828 F.3d 421

Tri County Wholesale Distributors, Inc.; The Bellas Company, Plaintiffs–Appellants/Cross–Appellees
v.
Labatt USA Operating Co., LLC ; Cerveceria Costa Rica, S.A., North American Breweries Holdings, LLC, Defendants–Appellees/Cross–Appellants.

Nos. 15–3710/3769

United States Court of Appeals, Sixth Circuit.

Argued: March 17, 2016
Decided and Filed: July 6, 2016

ARGUED: David W. Alexander, Squire Patton Boggs (US) LLP, Columbus, Ohio, for Appellants/Cross–Appellees. James B. Niehaus, Frantz Ward LLP, Cleveland, Ohio, for Appellees/Cross–Appellants. ON BRIEF: David W. Alexander, Larry J. Obhof Jr., Christopher F. Haas, Squire Patton Boggs (US) LLP, Columbus, Ohio, for Appellants/Cross–Appellees. James B. Niehaus, Christopher C. Koehler, Frantz Ward LLP, Cleveland, Ohio, for Appellees/Cross–Appellants.

Before: BOGGS, SILER, and BATCHELDER, Circuit Judges.

OPINION

BOGGS, Circuit Judge.

After Prohibition ended in 1933 when the Twenty–First Amendment was ratified, most states adopted a system for distributing alcoholic beverages that consists of three tiers: suppliers, distributors, and retailers. Suppliers manufacture or import alcoholic beverages, and they must sell their products to state-licensed distributors. Those distributors then sell the products to retailers, who sell them to consumers. While many economists are skeptical about the public benefits of this regulatory scheme, Ohio continues to operate under a three-tier system.

One feature of Ohio's three-tier system is that when a supplier and a distributor enter into a franchise agreement, the agreement is protected from termination without just cause. Ohio Rev. Code § 1333.85. That protection, however, is subject to an exception for when “a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition.” Id. § 1333.85(D). If such an acquisition occurs, the successor manufacturer may terminate the franchise if it repurchases the distributor's inventory of the products and “compensate[s] the distributor for the diminished value of the distributor's business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer.” Ibid. In this case, we consider the scope of transactions covered by § 1333.85(D) and the proper method for calculating the diminished value of a distributor's business. We also consider whether the Takings Clauses of the federal and Ohio constitutions protect distributors' franchises from termination under § 1333.85(D).

I

The plaintiffs in this case—Tri County Wholesale Distributors and Iron City Distributing (“the distributors”)—are distributors

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of alcohol in Ohio that entered into franchise agreements with a supplier—Labatt USA Operating Co., LLC (“Labatt USA Operating”). The franchise agreements allowed the distributors to sell several prominent brands of beer in their respective territories: Labatt, Genesee, Dundee, Honey Brown Lager, and Seagram's Escapes.

Labatt USA Operating is 100% owned and controlled by North American Breweries Holdings, LLC (“NAB Holdings”) through a series of five intermediate nested holding companies:

North American Breweries Holdings, LLC | 100% Ownership North American Breweries Intermediate Holdings, LLC | 100% Ownership North American Breweries, Inc. | 100% Ownership NAB Holdco, LLC | 100% Ownership North American Breweries Operating Holdco, LLC | 100% Ownership Labatt USA Operating Holdings, LLC | 100% Ownership Labatt USA Operating Co., LLC

Before December 11, 2012, the membership interests in NAB Holdings were owned by several investors (“KPS entities”). On December 11, the KPS entities sold their interests in NAB Holdings through a complex transaction that resulted in CCR American Breweries, Inc. (“CCR”) owning 100% of NAB Holdings. About three months later, on March 7, 2013, Tri County received a letter from CCR purporting to terminate Tri County's right to distribute the brands supplied by Labatt USA Operating. On March 11, 2013, Iron City received a similar letter. The letters claimed that CCR was entitled to terminate the franchise agreements because CCR's acquisition of NAB Holdings qualified under Ohio Revised Code § 1333.85(D) as a transaction in which “a successor manufacturer acquire[d] all or substantially all of the stock or assets of another manufacturer through merger or acquisition.”

The distributors responded by suing Cerveceria Costa Rica, S.A. (the owner of

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CCR), Labatt USA Operating, and NAB Holdings (“the suppliers”) for: (1) a declaratory judgment stating that the franchises cannot be terminated under § 1333.85(D) and an award of any damages resulting from the suppliers' attempted termination of the franchises; (2) in the alternative, a declaratory judgment stating that the suppliers may not terminate the franchises under § 1333.85(D) because doing so would violate the Takings Clauses of the federal and Ohio constitutions; or (3) in the alternative, if the suppliers may terminate the franchises under § 1333.85(D), the diminished value of the distributors' businesses.

The district court granted the suppliers judgment on the pleadings on the Takings Clause claim and summary judgment on the claim regarding the scope of § 1333.85(D). The court then held a bench trial to determine the diminished value of the distributors' businesses, the details of which will be discussed below. The court determined that the diminution of the values of Tri County and Iron City was $2,756,459 and $302,720, respectively.

The distributors now appeal the district court's rulings, raising four issues: (1) whether the suppliers were entitled to terminate the franchises under § 1333.85(D) ; (2) whether the terminations, if allowed under § 1333.85(D), violate the Takings Clauses of the federal and Ohio constitutions; (3) whether the district court should have included in the distributors' awards the net operating losses they were expected to incur after the termination of the franchises; and (4) whether the district court should have relied solely on the distributors' expert's proposed capital structure in calculating the diminished value of the distributors' businesses. The suppliers raise two additional issues in their cross-appeal: (1) whether the district court should have deducted profits earned by the distributors after the valuation date of the brands from the court's calculation of the diminished value of the distributors' businesses; and (2) whether the district court should have relied solely on the suppliers' expert's proposed capital structure in calculating the diminished value of the distributors' businesses.

II

The first issue is whether the suppliers were entitled to terminate their franchise agreements with the distributors under § 1333.85(D), a question of law that we review de novo. Lavado v. Keohane , 992 F.2d 601, 605 (6th Cir. 1993). Under Ohio Revised Code § 1333.85, suppliers cannot terminate franchise agreements without just cause, but § 1333.85(D) provides an exception for when “a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition or acquires or is the assignee of a particular product or brand of alcoholic beverage from another manufacturer.” The question here is whether § 1333.85(D) covers CCR's acquisition of NAB Holdings from the KPS entities.

The distributors argue that the suppliers are not entitled to terminate the franchise agreements because the statute requires “a successor manufacturer” to acquire the stock or assets of “another manufacturer.” According to the distributors, when a supplier is owned by a parent company, which itself may be owned by several layers of parent companies, transfers of ownership at the upper levels do not trigger § 1333.85(D), because the upper-level companies are not “manufacturers.” The distributors claim that only a company directly registered with Ohio's Division of Liquor Control can be a “manufacturer.” Thus, the distributors contend that neither NAB Holdings nor

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CCR is a manufacturer; only Labatt USA Operating is a manufacturer.

The district court rejected the distributors' argument because a strict reading of the word “manufacturer” as excluding parent companies would lead to a conclusion “that is illogical and could not have been the intent of the drafters,” quoting Esber Beverage Co. v. Labatt USA Operating Co. , Nos. 2011CA00113, 2011CA00116, 2012 WL 983171, at *6 (Ohio Ct. App. Mar. 12, 2012), aff'd , 138 Ohio St.3d 71, 3 N.E.3d 1173 (2013). In that case, the Ohio Court of Appeals considered Labatt USA Operating's acquisition of the Labatt brands from InBev, and its subsequent attempt to terminate a franchise agreement that gave Esber the right to distribute the brands in ten Ohio counties. Id. at *1–2. Esber argued that “because Labatt USA Operating Co. was created for the purpose of supplying the Labatt brands and it was not supplying anything to anyone until it acquired the Labatt brands ... Labatt USA Operating Co. was not a ‘successor manufacturer’ at the time it acquired the Labatt brands.” Id. at *6. The court disagreed with Esber's reading...