Guinness-Harp Corp. v. Jos. Schlitz Brewing Co.

Decision Date21 January 1980
Docket NumberGUINNESS-HARP,No. 317,D,317
Citation613 F.2d 468
PartiesTheCORPORATION, Plaintiff-Appellee, v. JOS. SCHLITZ BREWING COMPANY, Defendant-Appellant. ocket 79-7572.
CourtU.S. Court of Appeals — Second Circuit

Edward Wolfe, New York City (Haliburton Fales, 2d, James P. Laughlin, James H. Schnare, II, White & Case, New York City, on brief), for defendant-appellant.

Robert L. Haig, New York City (Eugene T. D'Ablemont, Christopher M. Nolland, Kelley, Drye & Warren, New York City, on brief), for plaintiff-appellee.

Before FRIENDLY, OAKES and NEWMAN, Circuit Judges.

NEWMAN, Circuit Judge:

This is an appeal from the granting of an injunction to preserve the status quo of a beer distributorship pending arbitration of the brewer's right to terminate its agreement with its distributor. The principal issues are whether the agreement provides for maintenance of the status quo during the arbitration and whether the availability of that relief is to be determined by the court or by the arbitrator.

The essential facts are not in dispute. Pursuant to an August, 1971 agreement, the Jos. Schlitz Brewing Co. and the Guinness-Harp Corporation provided that Guinness was to be the distributor of certain Schlitz products throughout most of New York City. No time limit was placed on the duration of the distributorship; instead, the agreement established specific circumstances and procedures by which the distributorship can be terminated. Paragraph 4 provided that Schlitz may terminate on ten days' notice in certain specified situations not claimed to be applicable to this case. Paragraph 5 contains an introductory section and four lettered sub-paragraphs. The introductory section states:

Should a breach occur by Buyer (Guinness) of any of the provisions of the Agreement, except the occurrence of any of the events as set forth in Paragraph 4 for which Seller (Schlitz) may terminate this Agreement, the following procedure will become effective Prior to the termination of Buyer by Seller : (Emphasis added).

Sub-paragraph 5(a) requires Schlitz to present to Guinness a list of particulars concerning the alleged breach and to give Guinness from 30 to 180 days to correct the breach. Sub-paragraph 5(b) allows any disagreement remaining after the period specified for correction of the breach to be submitted to a review panel established by Schlitz. The third and fourth sub-paragraphs constitute the arbitration provisions. Sub-paragraph 5(c) establishes the procedure for initiating arbitration, and states: "Any controversy or claim arising out of or relating to the Agreement, or any other agreement, or the breach thereof shall be settled by ARBITRATION . . . ." Sub-paragraph 5(d) states: "IT IS UNDERSTOOD THAT ARBITRATION SHALL BE THE SOLE REMEDY OF EITHER PARTY AGAINST THE OTHER . . ." and creates a single exception, not relevant here, in situations where there is money due to Schlitz from Guinness.

On March 14, 1979, Schlitz, dissatisfied with the sales performance of Guinness, sent Guinness a list of particulars pursuant to sub-paragraph 5(a) of the agreement, and specified a time period of sixty days for correction of the alleged deficiencies. Since Guinness' performance continued to be unacceptable to Schlitz at the end of the prescribed period, Schlitz informed Guinness that the agreement would be terminated on June 1, 1979. Guinness, insisting that it had fully performed its obligations, demanded a hearing by a Schlitz review panel, pursuant to sub-paragraph 5(b) of the agreement. Schlitz suspended the termination, held the review panel hearing on June 19, and concluded that there was just cause for termination. Guinness then demanded arbitration of the disagreement, pursuant to sub-paragraph 5(c). By letter dated July 10, 1979, Schlitz informed Guinness that the distributorship had been terminated on the previous day.

Guinness then brought suit in the Supreme Court of New York, seeking a declaration that termination of the distributorship could not occur until after arbitration, and an injunction restraining Schlitz from terminating until that arbitration had been concluded. The case was removed to the United States District Court for the Eastern District of New York on grounds of diversity of citizenship. The District Court (Jacob Mishler, Chief Judge), after an evidentiary hearing, issued a temporary restraining order that required Schlitz to resume shipping its products to Guinness for distribution. Shortly thereafter, the Court issued a preliminary injunction to the same effect, followed by an order enjoining Schlitz from terminating the distributorship until after the completion of arbitration. Schlitz appeals from this decision.

The principal issue raised by this appeal involves the proper interpretation of the distributorship agreement. Schlitz contends that sub-paragraphs 5(c) and 5(d) of the agreement require that all disputes between it and Guinness, including a dispute concerning the procedures to be followed prior to termination, must be submitted to arbitration. Guinness argues that the introductory section of paragraph 5 grants it the right to continue its distributorship unless and until termination has been found warranted by the arbitrator, and that this right to maintain the status quo pending arbitration can be enforced by a court.

At the outset, the procedural posture of the case should be clarified. Guinness has sought and the District Court has granted a preliminary injunction. Normally, such an injunction is preliminary to a plenary judicial hearing on the merits of the lawsuit. In this case, however, as both sides agree, the merits of their fundamental dispute whether grounds exist for ultimate termination of the distributorship is a matter for arbitration, not for the court. The "merits" of their lawsuit concern only whether there can be termination in the interval prior to completion of arbitration. 1 As to this issue, the injunction issued by the District Court is for all practical purposes a final injunction; it maintains the distributorship pending arbitration, and that is the relief for which Guinness brought this lawsuit. 2 Perhaps in a technical sense the injunction could be considered to be preliminary: the District Court could be thought to have issued the injunction only upon preliminary consideration, leaving Guinness to return to Court to secure a final injunction upon plenary consideration of the issue on the merits, I. e., entitlement to an injunction pending arbitration. But neither side has suggested that there is any reason to return to the District Court for further consideration of this issue. Hence what comes to us for review labeled a preliminary injunction is in substance a final injunction, albeit one of limited duration.

Recognition of the "final" nature of the injunction avoids the need of inquiring whether the traditional test for a preliminary injunction has been met: (a) irreparable harm plus (b) either probable success on the merits, or a sufficiently serious question on the merits to make it a fair ground of litigation and a balance of hardships tipping decidedly in the plaintiff's favor. Jackson Dairy, Inc. v. H. P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979). 3 Since the injunction plaintiff has obtained is in substance final, to resist this appeal plaintiff must show not simply a serious question or probable success on the merits; it must, like any plaintiff seeking to uphold a final judgment, demonstrate that its legal position is correct. At the same time, since the injunction, though temporary, is not really preliminary to any further court determination, the irreparable injury requirement of a preliminary injunction need not be met as such. However, to establish its entitlement to an injunction to enforce its interpretation of the status quo provision of the agreement, plaintiff must satisfy the traditional equitable standards for specific performance of a contract. The risk of injury to plaintiff if the injunction is denied remains in the case as an ingredient of plaintiff's burden to show that, on a balance of equities, it is entitled to equitable relief.

Thus, this case differs significantly from a case like Kahn Music Co. v. Baldwin Piano & Organ Co., 604 F.2d 755 (2d Cir. 1979), where a plaintiff also sought an injunction to maintain a franchise relationship pending determination of whether termination of the relationship was lawful. In Kahn Music the plaintiff asked the court to adjudicate the merits of the dispute and sought a traditional preliminary injunction pending that judicial determination. That injunction was issued after preliminary consideration, and it was preliminary to the broader final injunction plaintiff hoped to obtain to prevent termination of its franchise after the lawsuit. Here, plaintiff seeks from a court specific performance of a contract term that it alleges entitles it only to maintenance of the status quo pending resolution of the ultimate contract dispute by the arbitrator.

On the merits, the issue for determination in this case is whether Guinness' distributorship can be terminated during the period prior to arbitration. The Federal Arbitration Act, 9...

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