K.C. Co. v. Pella Corp.

Decision Date29 August 2022
Docket NumberCivil Action DKC 20-0227
PartiesK.C. COMPANY, INC., et al. v. PELLA CORPORATION
CourtU.S. District Court — District of Maryland

K.C. COMPANY, INC., et al.
v.
PELLA CORPORATION

Civil Action No. DKC 20-0227

United States District Court, D. Maryland

August 29, 2022


MEMORANDUM OPINION

DEBORAH K. CHASANOW UNITED STATES DISTRICT JUDGEv

Presently pending and ready for resolution in this contract dispute between a former franchisee and its franchisor is the motion for summary judgment filed by Defendant Pella Corporation, (ECF No. 46), and interim motions to seal filed by both parties, (ECF Nos. 48 and 51). The issues have been briefed, and the court now rules, no hearing being necessary. Local Rule 105.6. For the following reasons, all the motions will be granted.

I. Background

Unless otherwise noted, the following facts are undisputed. Defendant Pella Corporation (“Pella”) designs and manufactures windows and doors for residential and commercial buildings. (ECF No. 46-4, at ¶¶5-6). Plaintiff K.C. Company, Inc. (“KCC”) is a former franchisee or distributor of Pella's products. When KCC tried to sell its distribution rights to another company, Pella refused to give its consent to the sale. KCC eventually sued Pella for breach of contract. Now at summary judgment, the parties

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dispute whether Pella reasonably withheld its consent to the transfer, and whether KCC has developed evidence that it suffered damages.

Pella sells its products through four “channels.” (Id. at ¶7). One channel is the “Pella Direct Sales Network” (“PDSN”). Sellers in this channel exclusively or almost exclusively sell Pella products. (ECF No. 47, at ¶34). Another channel is the “Pella Pro-Dealer Channel.” Pro Dealer sellers often sell the products of multiple manufacturers. (ECF No. 46-4, at ¶11).

KCC, for decades, was a franchisee of Pella, operating as a PDSN distributor in a territory covering the Washington, D.C., and Baltimore, Maryland, metropolitan areas.[1] The vast majority of KCC's business was distributing Pella products. (ECF No. 46-8, at 41). KCC serviced its territory from a headquarters and warehouse in Beltsville, Maryland. It also operated four showrooms in Maryland and Virginia.

Pella and KCC operated according to two sets of distribution contracts, the “Trade Agreements,” (ECF Nos. 46-9 and 46-10), and the “Sales Branch Agreements,” (ECF Nos. 46-11 and 46-12). Together, these contracts gave KCC distribution rights for Pella

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products in the Washington and Baltimore regions. The parties agree that KCC's distributorship was collectively governed by these agreements. Under the Trade Agreements, KCC could not “sell, transfer or assign to any prospective purchaser of his business, his right to purchase Pella Products or operate as a Pella Products Distributor without securing prior written consent” from Pella. (ECF Nos. 46-9, at 4; 46-10, at 4). Pella contracted that its consent would not be “unreasonably withheld.” (Id.) Pella, however, reserved the “right to accept a replacement Distributor based upon its marketing needs, as well as the financial, sales and service ability of the new Distributor.” (Id.). Either party could terminate the Trade Agreement with one year's written notice. (Id.).

The Sales Branch Agreements similarly required KCC to obtain Pella's consent prior to a sale, transfer, or assignment of KCC's distribution rights. (ECF Nos. 46-11, at 5-6; 46-12, at 5-6). Again, Pella contracted that its consent would not be “unreasonably withheld.” (ECF Nos. 46-11, at 6; 46-12, at 6). Pella reserved the right to accept or reject a proposed replacement based on

its marketing needs, as well as the financial and other qualifications of the sales branch candidate, the business plans proposed by the sales branch candidate, and such other factors as Pella, in exercise of its business judgment determines are relevant to the longterm needs and business interest of its business
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(Id.). References to Pella's “business judgment” were “intended to establish a standard under which such judgment is subject to review in order to determine whether it reflects a business judgment exercised with a reasonable basis and not as a matter of pretext.” (Id. at 8). The Sales Branch Agreements were similarly terminable for any reason or no reason with one year's notice. (Id. at 6). The Sales Branch Agreements provide they will be “governed and construed in accordance with the laws of the State of Iowa without regard to its choice of laws provisions.” (Id. at 11).

A. PDSN and Pro Dealer Sellers

Of the four channels through which Pella sells its products, two are relevant in this case: the PDSN channel and the Pro Dealer channel. The channels, and the sellers operating within them, operated and were managed by Pella in different ways. (ECF No. 46-6, at 24). PDSN sellers only sold Pella products. Pro Dealer sellers, however, sold products from multiple manufacturers. The types of services offered by sellers also differed. PDSN sellers provided “value-add engineering,” becoming experts on a specific home and the windows and doors needed for it. (ECF No. 46-6, at 22). Pro Dealer sellers, however, often sold bundles of building products, such as roofing, decking, fencing, and windows, to

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builders.[2] PDSN sellers also had the unique right of first refusal to provide service on any Pella product in their region, irrespective of the original seller. For example, if a Pro Dealer sold a Pella window, it was the PDSN seller in that region who had first right of refusal to provide any service needed on the window. Pella believes this gives PDSN sellers an advantage in building their customer set. (ECF No. 46-6, at 24-25). PDSN sellers are also “owner/operators,” whose owners have individual leadership with their own capital invested in the business, whereas most of Pella's Pro Dealers tend to have a corporate structure. (ECF No. 46-6, at 25-26).

Pella was, and is, concerned about managing “channel conflicts,” a “term used to characterize the disagreements between and among a supplier and its resellers.” (ECF No. 47, at ¶19). Channel conflicts can take different forms, including conflict between the supplier and reseller within a given channel; a conflict among members of a given channel; or conflict among the supplier, members of the existing in channel, and a reseller comprising a different channel. (ECF No. 47, at ¶19). Manufacturers and sellers generally have competing desires. Manufacturers prefer wide distribution networks with many

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competing resellers who are focused on the manufacturer's product. One way to achieve that focus is to have resellers that do not sell directly competing products. Resellers, on the other hand, prefer exclusive territories without direct competition and the ability to sell a selection of goods and services. (ECF No. 47, at ¶19). When manufacturers are using two or more distinct channels, the channels may operate in different ways. The differences may result in different marketing structures with different margins. Moreover, services that may be needed in one channel may not be required in another. (ECF No. 47, at ¶23). Pella believes that, because its four channels provide different services and purchasing environments to different types of customers with different preferences, its distribution system is set up to avoid significant conflict between channels. (ECF Nos. 46-4, at ¶13; 47, at ¶¶31 and 43).

B. Pella's Decision to Require KCC to Break Up its Washington-Baltimore Business

In 2014 and 2015, Pella began designing and developing a new marketing plan called the “Top-100 Strategy.” (ECF Nos. 46-6, at 4; 46-8, at 11).[3] The goal was to acquire greater market shares

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in the top 100 metropolitan statistical areas across the country. Washington, D.C., and Baltimore are separate metropolitan statistical areas, and both are among the top 100. (ECF No. 466, at 7-8). Pella analyzed data and determined that when a distributor was servicing multiple metropolitan statistical areas, the metropolitan area in which the distributor's headquarters was located had a higher market share than the other areas. (Id. at 6-7). KCC's headquarters was in Beltsville, Maryland, within the DC metropolitan statistical area. (Id. at 7-8). Thus, in August of 2015, Pella asked KCC to split up its Washington and Baltimore markets and sell one of them to a new owner.[4] (ECF Nos. 46-16, at 2; 46-8, at 15-16).

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Pella also asked for greater investment in the Baltimore region in the form of a new management team and a new operating facility for inventory and logistical support. (ECF No. 49-1, at ¶4). Pella's hope and goal was that independent ownership would result in greater market penetration in Baltimore. (ECF No. 46-6, at 8).

Kevin Cassidy, KCC's president and owner, did not want to split up Washington and Baltimore, but he also did not believe the Top 100 Strategy was being pursued with “malintent.” (ECF No. 468, at 16, 18). Initially, Mr. Cassidy responded to Pella's request by offering to sell the entirety of KCC's business when he retired within three years. He had already been planning on retiring and possibly selling the business within three to five years. (ECF No. 46-13, at 2). In the meantime, he told Pella he would expand KCC's facilities and operations in Baltimore. Pella, however, insisted that three years would be too long. (ECF No. 50-1, at 2). Ultimately, Charlie Maskell, a member of KCC's advisory board who Mr. Cassidy designated to act on behalf of KCC and Mr. Cassidy throughout the sale process, proposed in April of 2016 that Pella allow KCC to sell the Washington-Baltimore region to a single

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buyer. (ECF No. 47-2, at 3). Pella agreed and reiterated that it would continue to offer support to help KCC sell the business.

Within a month, Pella and KCC had signed a memorandum of understanding (“MOU”) that set out a general framework for how the sale effort would proceed. The MOU set out four phases: (1) KCC would engage a broker; (2) KCC and the broker...

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