Famous Brands, Inc. v. David Sherman Corp.

Decision Date20 March 1987
Docket NumberNo. 86-5029,86-5029
Citation814 F.2d 517
Parties1987-1 Trade Cases 67,487, 4 UCC Rep.Serv.2d 68 FAMOUS BRANDS, INC., Appellant, v. DAVID SHERMAN CORPORATION, Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Rick Johnson, Gregory, S.D., for appellant.

P. John Owen, Kansas City, Mo., for appellee.

Before LAY, Chief Judge, FAGG, Circuit Judge, and LARSON, * Senior District Judge.

LAY, Chief Judge.

Famous Brands, Inc. (Famous) brought this diversity action, claiming that it had an enforceable, exclusive contract for South Dakota distribution rights to Everclear grain alcohol, which is bottled by the David Sherman Corporation (Sherman). Sherman withdrew Everclear from Famous and granted South Dakota distribution rights to a third party, Premier Wine and Spirits, when Famous did not carry Sherman's entire line of liquors. Famous sued to enforce the alleged contract and brought additional counts for deceit and violation of the antitrust laws.

The district court 1 granted defendant Sherman's motion for summary judgment on all counts. The court had before it depositions, documents, affidavits, and the record from an earlier preliminary injunction hearing, at which Sherman prevailed. For the purposes of its summary judgment motion, Sherman accepted the plaintiff's evidence in its entirety. Sherman argues that based on the "undisputed" facts, Famous' claims are insufficient as a matter of law. The issue on appeal is whether summary judgment for Sherman was proper on each of the three counts raised in Famous' complaint. We affirm in part and reverse in part.


In 1982 Famous, a liquor wholesaler in Sioux Falls, South Dakota, began negotiating to buy Midland Distributors, another Sioux Falls wholesale house. After litigation 2 interrupted this attempt once, in late 1983 Famous resumed its effort to acquire Midland. According to Lynn Johnson, president of Famous, the ultimate purchase depended on Midland's suppliers' consent to continue to supply and do business with any purchaser of Midland. 3 He stated that the supply lines were "like assets."

Numerous contacts between Famous and Sherman were made, primarily because Sherman controlled Midland's supply of Everclear, a trademarked product that held over ninety percent of the grain alcohol market in South Dakota. On November 1, 1983, Paul Lux, the president of Sherman, wrote a letter to Famous stating: "[I]f [the Midland purchase] happens, I want you to know that we will be more than happy to have you distribute Everclear alcohol and any other brands that Midland will be selling for us." Later, Lux told Lynn Johnson that Famous could "count on" Sherman after Famous' purchase of Midland took effect. 4 On appeal, Sherman concedes these communications. Based on this background, according to Johnson's testimony "Everclear was one of the franchises that we paid blue sky for."

Thereafter Sherman supplied primarily Everclear to Famous until February 20, 1985, when representatives of Sherman told Famous that it was being terminated because "you will not handle our proprietary lines." According to Lux, Sherman requires all its wholesale distributors to carry all of its lines. Famous refutes this by evidence that its successor to the Sherman line, Premier Wine and Spirits, carries only a few of the Sherman products. Midland also had carried only a few of Sherman's products besides Everclear.

Both parties, as reflected through the testimony of Johnson and Lux, indicate that a distributorship can continue indefinitely unless mutual problems cannot be resolved. Famous relies on this industry practice or custom for its claim that Sherman's statements created a perpetual, exclusive contract to distribute Everclear grain alcohol in South Dakota.

1. The Contract Claim

Based on the historical facts outlined above, the district court granted summary judgment for Sherman on two grounds: (1) the terms of the contract were indefinite; and (2) there was no mutuality of obligation. We find the district court erred in doing so.

Regarding the first point, South Dakota contract law recognizes the validity of implied contracts. See S.D. Codified Laws Ann. Sec. 53-1-3 (1980 rev.). As the South Dakota Supreme Court has explained:

A contract is implied in fact where the intention as to it is not manifested by direct or explicit words by the parties, but is to be gathered by implication or proper deduction from the conduct of the parties, language used, or acts done by them, or other pertinent circumstances attending the transaction.

Mahan v. Mahan, 80 S.D. 211, 121 N.W.2d 367, 369 (1963). An earlier South Dakota case held that "the facts are viewed objectively, and if a party voluntarily indulges in conduct reasonably indicating assent he may be bound even though his conduct does not truly express the state of his mind." Federal Land Bank v. Houck, 68 S.D. 449, 4 N.W.2d 213, 219-20 (1942); see also Mitzel v. Hauck, 78 S.D. 543, 105 N.W.2d 378, 380 (1960).

An agreement is not too indefinite to form a contract when the parties operated under it for over a year, as Famous and Sherman did. The evidence shows that Sherman readily supplied Everclear to Famous for distribution and Famous carried out its promotion and selling of Everclear throughout the year. Distributorship agreements are by their very nature indefinite, often being made definite only by the conduct of the parties, which reflects their intentions. We find under South Dakota law sufficient circumstances to at least create a jury question as to the existence of an implied contract between the parties.

Contracts should be construed according to the construction placed on them by the parties, as demonstrated by their contemporaneous and subsequent conduct. See Malcolm v. Malcolm, 365 N.W.2d 863, 865 (S.D.1985); Huffman v. Shevlin, 76 S.D. 84, 89, 72 N.W.2d 852, 855 (1955); Janssen v. Muller, 38 S.D. 611, 162 N.W. 393, 394 (1917). 5 To apply this doctrine to the present question of contract formation would uphold the long-standing South Dakota policy favoring validation of contractual relations. See Kuhfeld v. Kuhfeld, 292 N.W.2d 312, 315 (S.D.1980) (citing Trumbauer v. Rust, 36 S.D. 301, 154 N.W. 801 (1915); Sarles v. Sharlow, 5 Dak. 100, 37 N.W. 748 (S.D.1888); Cheatham v. Wilbur, 1 Dak. 335, 46 N.W. 580 (S.D.1876)).

To summarize, when an informal agreement is followed by conduct arguably pursuant to that agreement, the fundamental question of definiteness comes down to the understanding and intention of the parties did they intend to consent to a continual, 6 binding distributorship agreement? We find this to be a genuine issue of material fact that must be decided by the jury.

The trial court also found mutuality of obligation lacking in that Famous could cease doing business at any time, while Sherman allegedly could not. Here again we cannot agree. As this court stated in Clausen & Sons, Inc. v. Theo. Hamm Brewing Co., 395 F.2d 388 (8th Cir.1968), " '[m]utuality of obligation' is only a semantical exercise surrounding the real determinant of a contract, namely, consideration." Id. at 389. Although Clausen applied Minnesota law, it is clear that South Dakota law is supportive of the Clausen rationale. As stated in Lien v. Northwestern Engineering Co., 73 S.D. 84, 39 N.W.2d 483, 488-89 (1949): "Where there is an agreement founded on a consideration, it is not invalid for want of mutuality because it is obligatory on one party and optional on the other."

Our inquiry thus turns to whether Famous produced sufficient evidence from which a factfinder could have found consideration. Under S.D.Codified Laws Ann. Sec. 53-6-1, "consideration" is defined as "[a]ny benefit conferred or agreed to be conferred upon the promisor by any person to which the promisor is not lawfully entitled, or any prejudice suffered or agreed to be suffered by such person, other than such as he is at the time of consent lawfully bound to suffer as an inducement to the promiser."

Famous points to its implied promise to promote Everclear as consideration for Sherman's "promise," a theory twice accepted by the Wisconsin Supreme Court. See Simon Bros. Co. v. Miller Brewing Co., 83 Wis.2d 701, 266 N.W.2d 369, 372-73 (1978); California Wine Ass'n. v. Wisconsin Liquor Co., 20 Wis.2d 110, 121 N.W.2d 308, 314 (1963). Sherman, on the other hand, dismisses any promise to promote as a "bootstrap" onto a nonexistent promise by Sherman. We read South Dakota law to support the proposition that if Sherman did promise to supply Everclear to Famous, then an implied return promise 7 by Famous to promote it would be consideration. Famous' promise would be contingent on Sherman fulfilling its promise to sell. Cf. Endres v. Warriner, 307 N.W.2d 146, 149 (S.D.1981) (finding adequate consideration in promise contingent on third party action). Contrary to Sherman's arguments, this is not an "illusory" promise. As Justice (now Circuit Judge) Wollman wrote for the South Dakota Supreme Court: "A promise is illusory 'only if it in no way limits the promisor's future action. * * * [Where a party has] impliedly promised to use his best effort [to carry out the goals of the contract] * * * there was adequate consideration." Id. (quoting Douglas v. City of Dunedin, 202 So.2d 787, 788 (Fla.Dist.Ct.App.1967)).

This arrangement also could be regarded as a "requirements" contract, under which Sherman promised to fill all of Famous' Everclear needs in return for Famous' promise to buy all of its Everclear from Sherman. South Dakota law recognizes requirements contracts. See Teigen Const., Inc. v. Pavement Specialists, Inc., 267 N.W.2d 574, 578 (S.D.1978); S.D.Codified Laws Ann. Sec. 57A-2-306(1) (applicable in transactions covered by the Uniform Commercial Code). Even if the promise to buy is implied, this is not invalid for lack of the promise to sell mutuality. Teigen, 267 N.W.2d at 578; see also Sulzbach v. Town of...

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