Optima Tobacco Corp. v. U.S. Flue-Cured Tobacco Growers, Inc.

• Decision Date: 30 September 2019
• Docket Number: No. 5:16-CV-889-D,5:16-CV-889-D
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: OPTIMA TOBACCO CORPORATION, Plaintiff, v. U.S. FLUE-CURED TOBACCO GROWERS, INC., and UETA, INC., Defendants.

OPTIMA TOBACCO CORPORATION, Plaintiff, v. U.S. FLUE-CURED TOBACCO GROWERS, INC., and UETA, INC., Defendants.

No. 5:16-CV-889-D

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA WESTERN DIVISION

September 30, 2019

ORDER

On November 9, 2016, Optima Tobacco Corporation ("Optima Tobacco" or "plaintiff") filed a complaint against U.S. Flue-Cured Tobacco Growers, Inc. ("U.S. Flue-Cured") and UETA, Inc. ("UETA"; collectively, "defendants") for breach of contract [D.E. 1, 8]. On November 30, 2018, defendants moved for summary judgment [D.E. 90, 92] and filed memoranda in support [D.E. 91-1, 93], a joint statement of material facts [D.E. 91-2], and appendices [D.E. 91, 94]. On December 21, 2018, Optima Tobacco responded in opposition [D.E. 97-1] and filed a counter-statement of material facts [D.E. 97-2] and an appendix [D.E. 97]. On January 4, 2019, defendants replied [D.E. 100-102]. As explained below, the court grants in part and denies in part defendants' motions for summary judgment and dismisses U.S. Flue-Cured from the action.

I.

Optima Tobacco is a Florida corporation that brokers or distributes tobacco products, but does not manufacture its own products. See [D.E. 91-2] ¶ 14; Judge Dep. [D.E. 91-68] 23. James Judge ("Judge") and Daniel Makepeace ("Makepeace") own Optima Tobacco. See [D.E. 91-2] ¶ 14; Judge Dep. [D.E. 91-68] 7. Judge runs Optima Tobacco from his home. See [D.E. 91-2] ¶ 14; Judge Dep. [D.E. 91-68] 23. U.S. Flue-Cured is a North Carolina corporation that makes private-label cigarettes and other tobacco products. See [D.E. 91-2] ¶ 11; [D.E. 40] ¶¶ 1-2. UETA is a Panama corporation that sells cigarettes and other products in duty-free stores in both North and South America. See [D.E. 91-2] ¶ 13; [D.E. 39] ¶¶ 1-3.

In 2007, Aaron Gewirtz ("Gewirtz") called Judge on UETA's behalf to find a manufacturer to make private-label cigarettes for UETA to sell. See [D.E. 91-2] ¶ 15; Ex. 40 [D.E. 91-31] 11-12; Ex. 39 [D.E. 91-30] ¶ 20; Judge Dep. [D.E. 91-68] 11, 13. Judge contacted Stephen Daniel ("Daniel"), the Executive Vice President of U.S. Flue-Cured in 2007, about the business opportunity. However, Judge did not disclose that UETA would be the ultimate distributor. See [D.E. 97-2] ¶ 16; Daniel Dep. [D.E. 91-72] 11-12. Daniel responded positively to Judge because collecting payment from Optima Tobacco would be less risky than attempting to collect payment directly from a foreign distributor, like UETA. See Daniel Dep. p.E. 91-72] 11-13.

Two oral contracts resulted. See [D.E. 91-2] ¶ 17. UETA orally agreed to order private-label cigarettes from Optima Tobacco. See id.; Judge Dep. [D.E. 91-68] 17. Once UETA had placed an order with Optima Tobacco, Optima Tobacco would send a manufacturing order to U.S. Flue-Cured. See [D.E. 91-2] ¶ 17. U.S. Flue-Cured would manufacture the cigarettes and sell them to Optima Tobacco, which would then resell the cigarettes to UETA. See id. Although Optima Tobacco initially handled shipping, UETA soon handled all shipping itself. See id.; Judge Dep. [D.E. 91-68] 24. Optima Tobacco paid U.S. Flue-Cured $1.85 per carton and paid Gewirtz $0.06 per carton as a commission. See [D.E. 91-2] ¶ 19. UETA paid Optima Tobacco $2.16 per carton. See id. Moreover, UETA paid Optima Tobacco before Optima Tobacco paid U.S. Flue-Cured. See [D.E. 97-2] ¶ 24.

From 2007 to 2012, Optima Tobacco grossed approximately $0.25 per carton under the oral contracts. Cf. [D.E. 91-2] ¶ 19. Optima Tobacco occasionally negotiated price increases from UETA so that it could pay U.S. Flue-Cured more while maintaining its margin. See id.; Judge Dep. [D.E. 91-68] 25-26. However, neither UETA nor U.S. Flue-Cured knew how much profit Optima Tobacco was earning, and UETA and U.S. Flue Cured did not deal with each other directly. See[D.E. 91-2] ¶ 20; Ex. 40 [D.E. 91-31] 11-12. During this time-period, the twin oral contracts were terminable at will. See [D.E. 91-2] ¶ 22; [D.E. 97-2] ¶ 22; Ex. 40 [D.E. 91-31] 22; Judge Dep. [D.E. 91-68] 26; Daniel Dep. [D.E. 91-72] 15.

Optima Tobacco initially was responsible for creating the private-label cigarette design (i.e., packaging, filtration, etc.) and worked with KneX, a separate company which Makepeace owned, to do so. See [D.E. 91-2] ¶ 18; Judge Dep. [D.E. 91-68] 16, 19. Optima Tobacco also created the Sheriff, Patrol, and Smoking Gun brands of private-label cigarettes. See [D.E. 97-2] ¶ 19; Judge Dep. [D.E. 91-68] 19-20. Among these three brands, the Sheriff brand comprised most of what UETA ordered. See [D.E. 97-2] ¶ 19; [D.E. 91-63] 7.

UETA became uncomfortable with this informal arrangement, and in 2010, requested that the parties draft a written contract to define their rights and duties. See [D.E. 91-2] ¶¶ 25-26; Judge Dep. [D.E. 91-68] 23; Daniel Dep. [D.E. 91-72] 15.¹ UETA made this request because it wanted to have an exclusive agreement with U.S. Flue-Cured. See [D.E. 91-20] ¶ 26; Daniel Dep. [D.E. 91-72] 15. U.S. Flue-Cured also wanted a written contract because Optima Tobacco represented a substantial portion of its business. See [D.E. 91-2] ¶ 26.² Thus, on June 27, 2011, U.S. Flue-Cured circulated a first draft of a written contract that all three parties would sign in 2012 ("the 2012 agreement"). See id. ¶ 29; Ex. 14 [D.E. 91-11] 1-16.

The parties dispute several aspects of the negotiating process that led to the 2012 agreement. According to defendants, Optima Tobacco "tried to keep the two 'contracts' separate in an effort to keep its margins confidential" because Optima Tobacco knew that "UETA (if not also [U.S. Flue-Cured]) would be upset" about Optima Tobacco's high margins. [D.E. 91-2] ¶ 27. Defendants also assert that Judge falsely told UETA that UETA could not contact U.S. Flue-Cured directly. See id. ¶28; Ex. 2 [D.E. 94-2]; Ex. 72 [D.E. 94-72]. In contrast, Optima Tobacco claims that U.S. Flue-Cured knew Optima Tobacco's margins but did not care. See [D.E. 97-2] ¶ 27; Daniel Dep. [D.E. 91-72] 57 (stating that making tobacco is the "easiest thing" in the tobacco industry while selling it is the "hardest thing"). Although Optima Tobacco concedes that it did not want UETA and U.S. Flue-Cured to contact each other directly, Optima Tobacco claims that it feared that defendants would exclude it from the arrangement, not that it wanted to keep its margins secret. See [D.E. 97-2] ¶ 28; cf. Judge Dep. [D.E. 91-68] 44.

Defendants retained counsel to negotiate and draft the 2012 agreement, which went through several rounds of revisions. See [D.E. 91-2] ¶ 30; Exs. 13-30 [D.E. 91-13-91-30] (e-mails and drafts of the 2012 agreement). Optima Tobacco did not retain counsel. See [D.E. 91-2] ¶ 31; Judge Dep. [D.E. 91-68] 28-29. Instead, Judge personally reviewed all proposed modifications to the drafts of the 2012 agreement and accepted all changes that UETA or U.S. Flue-Cured proposed. See Judge Dep. [D.E. 91-68] 28-29. Judge "had complete faith that the contract would be fine" and did not "recall specifically offering edits to the contract." Id. at 29.

The parties highlight the drafting process of several clauses in the 2012 agreement. First, the draft agreements only contained one price per carton labeled as the "UETA Purchase Price." [D.E. 91-2] ¶ 32. It was initially unclear to the parties, however, whether the "UETA Purchase Price" was the price that UETA paid to Optima Tobacco or the price that Optima Tobacco paid to U.S. Flue-Cured. See id. ¶ 33. Second, the "whereas" clauses of the drafts did not mention Optima Tobacco. See id. ¶ 34. Third, an introductory clause stated that Optima Tobacco was a party. See [D.E. 97-2] ¶ 34; Ex. 30 [D.E. 91-26] 1; Ex. 16 [D.E. 91-13] 3. Fourth, although an earlier draft provided that U.S. Flue-Cured would pay Optima Tobacco a percentage commission, see Ex. 17 [D.E. 91-14] 9-10, U.S. Flue-Cured replaced that term with an express statement that U.S. Flue-Cured would not be responsible for compensating Optima Tobacco under the 2012 agreement. See [D.E. 91-2] ¶ 35; Ex. 18 [D.E. 91-18] 9; Ex. 30 [D.E. 91-26] 8; Judge Dep. [D.E. 91-68] 60; Gewirtz Dep. [D.E. 91-70] 58-60; Daniel Dep. [D.E. 91-72] 18. Finally, UETA proposed that the parties change the modification clause and termination clause of the draft to read that "both parties" could modify the 2012 agreement and that "either party" could terminate the 2012 agreement, respectively. See id. ¶ 36; Ex. 22 [D.E. 91-18] 13, 16.³ Before this change, the termination clause had read that "any party" could terminate the 2012 agreement. See [D.E. 91-2] ¶ 36.

During negotiations, Judge told UETA that U.S. Flue-Cured required at least $2.16 per carton from Optima Tobacco. See id. ¶ 37; Ex. 20 [D.E. 91-16]. Judge also stated that U.S. Flue-Cured was receiving offers as high as $2.25 per carton from Mexican distributors. See Ex. 20 [D.E. 91-16]; Ex. 21 [D.E. 91-17] 2. According to defendants, these representations were false. See [D.E. 91-2] ¶ 37. Optima Tobacco disputes that Judge's representations were false and claims that Judge believed U.S. Flue-Cured had received such offers from Mexican distributors. See [D.E. 97-2] ¶ 37; see also Daniel Dep. [D.E. 91-72] 38; Judge Dep. [D.E. 91-68] 62-63. Moreover, Optima Tobacco claims that it requested a price increase from UETA so that it could increase its payments to U.S. Flue-Cured. See [D.E. 97-2] ¶ 37.

In September 2012, the parties executed the 2012 agreement. See [D.E. 91-2] ¶ 38; Ex. 30 [D.E. 91-26] 16. Among other provisions, the 2012 agreement contained a five-year term, subject to renewal for a sixth year. See Ex. 30 [D.E. 91-26] 10. The 2012 agreement stated that UETA would exclusively purchase cigarettes through the arrangement. See id. at 2-3, 19. UETA also promised to pay Optima Tobacco $2.24 per carton for the Sheriff brand of cigarettes and $2.16 per carton for the other two brands. See id. at 22.

The 2012 agreement's introductory clause stated that Optima Tobacco was a party. See id. at 1. Article 7 imposed...