The Citri-lite Co. v. Cott Beverages Inc.

• Decision Date: 14 June 2010
• Docket Number: No. 1:07-CV-01075-OWW-DLB.,1:07-CV-01075-OWW-DLB.
• Citation: 721 F.Supp.2d 912
• Parties: The CITRI-LITE COMPANY, a California corporation, Plaintiff, v. COTT BEVERAGES, INC., dba Cott Beverages U.S.A., a Florida corporation, and Does 1 through 25, Defendants.
• Court: U.S. District Court — Eastern District of California

721 F.Supp.2d 912

The CITRI-LITE COMPANY, a California corporation, Plaintiff,

v.COTT BEVERAGES, INC., dba Cott Beverages U.S.A., a Florida corporation, and Does 1 through 25, Defendants.

No. 1:07-CV-01075-OWW-DLB.

United States District Court,E.D. California.

June 14, 2010.

David Jeremy Cooper, Tracy M. Saiki, Klein, Denatale, Goldner, Cooper, Rosenlieb & Kimball, LLP, Bakersfield, CA, for Plaintiff.

Gregory A. Ellis, Scheper Kim and Harris LLP, Los Angeles, CA, for Defendants.

MEMORANDUM DECISION RE: DEFENDANT'S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT (DOC. 36)

OLIVER W. WANGER, District Judge.

I. INTRODUCTION

Before the court is a motion for summary judgment or, in the alternative, partial summary judgment brought by Defendant Cott Beverages, Inc. (“Cott”). The motion is directed at the claims for breach of contract and breach of the implied covenant of good faith and fair dealing asserted by Plaintiff The Citri-Lite Company (“Citri-Lite”).

In this removed diversity action, Citri-Lite contends that Cott breached its contractual obligation to use “commercially reasonable efforts” to promote and sell “Slim-Lite,” a beverage that Citri-Lite created. In Cott's summary judgment motion, Cott argues that, under a proper interpretation of the contract, it satisfied its obligation to use commercially reasonable efforts to promote and sell Slim-Lite. Alternatively, Cott argues that Citri-Lite cannot establish that its purported damages were caused by any breach by Cott, and that Citri-Lite's damages theories are “legally unsound.” The following background facts are taken from the parties' submissions in connection with the motion and other documents on file in this case. ¹

II. BACKGROUND

A. The Parties

Cott is a Georgia corporation with its principal place of business in Tampa, Florida. (Doc. 40 at 2.) Cott produces and distributes non-alcoholic beverages including carbonated soft drinks, sparkling and flavored mineral waters, energy drinks, juice drinks, ready-to-drink teas, and other non-carbonated beverages. ( Id.) Citri-Lite is a California corporation with its principal place of business in Grass Valley, California. ( Id.) Citri-Lite incorporated in 1996 to produce and market Slim-Lite, a noncarbonated, zero calorie, fruit-flavored drink. ( Id. at 2-3.) Between 1996 and 2002, Citri-Lite operated at a loss. ( Id.)

B. The Licensing Agreement

On December 28, 2003, Citri-Lite and Cott entered into a written agreement entitled “Intellectual Property License And Purchase Option Agreement” (“Agreement”), which is governed by California law. (Doc. 17 at 6; Doc. 40 at 3.) The initial term of the Agreement is two (2) years, starting on December 28, 2003, with automatic two-year extensions. ( Id.) Under Section 8.1, however, Cott had the right to terminate the Agreement at any time upon sixty (60) days prior written notice. ( Id.; Doc. 40 at 4.) ²

Under the terms of the Agreement, Citri-Lite granted Cott the exclusive right to use the Slim-Lite® brand identity and all associated intellectual property rights, as defined by the Agreement, for purposes of the manufacture, production, distribution, sale and marketing of Slim-Lite. (Doc. 17 at 6.) In exchange, Cott agreed to make royalty payments to Citri-Lite based on a rate of fifty cents ($0.50) per case of product sold (i.e., fifty cents per 240 ounces of the product sold by Cott), with a guaranteed minimum royalty of $350,000 per year. ( Id.; Doc. 40 at 4.) ³

The Agreement also contained a clause which required Cott to spend a certain amount to market Slim-Lite and to “otherwise use commercially reasonable efforts to promote and sell” Slim-Lite “so as to maintain and enhance the value of the goodwill” inhering in Slim-Lite® and “produce the maximum amount of” royalty under the Agreement:

2.4. Licensee's Effort To Sell. During the Term, the Licensee will spend on average over each rolling twelve (12) month period during the Royalty Term the sum of Eight Cents ($.80) per Case of Product sold by Licensee during such rolling twelve (12) month period to market the Products. Licensee shall otherwise use commercially reasonable efforts to promote and sell the Products so as to maintain and enhance the value of the goodwill residing in the Intellectual Property and to produce the maximum amount of Royalty under this Agreement consistent with the quality control provisions of this Article 2.

(Doc. 38, Ex. 3 at 4) (emphasis added.) The “Royalty Term” is defined in the Agreement as “any one-year period during which this Agreement is in effect commencing on the Effective Date [December 28, 2003] or an anniversary of the Effective Date.” ( Id. at 2.) The term “Case” is defined as the “quantity of twelve (12) containers of the product, where each container holds twenty (20) ounces or any configuration of containers.” ( Id. at 2.) The term “Products” means the “the non-carbonated, zero calorie soft drink marketed and sold by Licensor under the name SLIM-LITE® and/or that contains Citrimax and/or ChromMate.” ( Id.) The term “commercially reasonable efforts” is not defined in the Agreement and the Agreement did not identify specific marketing efforts which were required of Cott. (Doc. 40 at 6.)

The Agreement gave Cott an option to purchase the exclusive distribution and marketing rights, including numerous intellectual property rights, associated with Slim-Lite for a price of one million dollars ($1,000,000) with certain continued payments to Citri-Lite-“forty (40) cents per Case of Products sold”-for a period of ten years. (Doc. 17 at 7.)

C. Cott's Selling And Promoting Of Slim-Lite 1. Overview

When Cott entered into the Agreement with Citri-Lite, 248 Sam's Club stores (or clubs) carried Slim-Lite. (Doc. 40 at 13.) In 2004, during the first year of the Agreement, the sales volume of Slim-Lite increased and more Sam's Clubs began carrying Slim-Lite than ever before. (Doc. 40 at 13, 17, 45-46.) Despite what appeared to be a successful first year, by May 2005 Cott began considering an “exit strategy” for Slim-Lite. (Doc. 45, Ex. 143; Doc. 42 at 29). By October 2005, less than two years into the Agreement, Cott informed Citri-Lite that it wanted to terminate the Agreement. (Doc. 40 at 52-53). According to Citri-Lite, before the Agreement ended, Cott mishandled the marketing of Slim-Lite in at least three ways, breaching its commitment to use “commercially reasonable efforts” to promote and sell the product.

First, in 2004, after Cott took over Slim-Lite, it continued Citri-Lite's practice of conducting in-store demos of Slim-Lite at Sam's Club. In 2005, however, Cott reduced and then stopped all of its demo activity at Sam's Club. According to Citri-Lite, this slow down and termination of demo activity negatively impacted Slim-Lite's success at Sam's Club.

Second, toward the end of 2004, Cott was developing a “repackaging strategy” for Slim-Lite as part of a major initiative aimed at solidifying long term distribution of Slim-Lite in Sam's Club and Walmart. Cott, however, failed to actually implement the repackaging change despite recognizing its importance to Slim-Lite's success and despite Sam's Club's request that it be done.

Third, while focusing its energy on Sam's Club and Walmart, Cott neglected other retailers, including Food Lion, another merchandiser of Slim-Lite. According to Citri-Lite, Cott did not develop any particular marketing plan for Food Lion and did not engage in sufficient promotional activity at Food Lion.

2. Efforts At Sam's Club

a. The Buyers

During the time Cott marketed Slim-Lite at Sam's Club, it worked with two Sam' Club buyers: Jim Dragovich and Becky Fields. Both Dragovich and Fields had discretion to modify the distribution of beverages under their respective categories, and both had the discretion to cancel beverages in their categories. (Doc. 40 at 9-10, 12.)

b. Demos And Packaging Changes

In 2004, Cott promoted Slim-Lite at Sam's Club through in-store demos. (Doc. 40 at 37.) Sam's Club used its own employees to run the in-store demos and charged the vendor (Cott) approximately $150 per demo in each store. ( Id. at 13.) Sam's Club also charged the full retail price for the products used in demos, thus requiring the vendor to purchase their own sampled products. ( Id.) Demos of Slim-Lite initially led to an approximate 20% increase in sales during demo weeks. ( Id.) Cott spent over $800,000 for Slim-Lite demos at Sam's Clubs in 2004. ( Id.)

Apart from promoting the product through in-store demos at Sam's Club, by September 2004, Cott employees developed a plan to change the packaging of Slim-Lite to a 24-pack containing 16.9 ounce bottles with registered shrink wrap. ( Id. at 24, 27.) At the time, Cott was selling Slim-Lite to Sam's Club in a 12-pack containing 20 ounce bottles with transparent clear shrink wrap. (Schiederer Dep. 59:24-60:3; Doc. 36 at 7.) Cott was “seeing a movement toward 16.9oz as the preferred serve size from several competitors-a trend for the category as a whole.” (Doc. 47, Ex. 17.)

Sam's Club regularly worked with suppliers, like Cott, to determine what kind of packaging to use for their products and, according to Dragovich, the idea for Slim-Lite's packaging change originated from Sam's Club. (Dragovich Dep. 42:17-20, 79:19-22.) A 16.9 ounce bottle was a “focus” for Sam's Club as they were “trying to line up 16.9 ounce [bottles] [for] all our beverages.” (Dragovich Dep. 76:4-8; 79:19-22.) Further, according to Dragovich, “tuxedo wrap, the four-color, high graphic wrap was something we were asking our suppliers to look at as well because it promoted their product much better and where we made those changes, we saw increases in sales.” (Dragovich Dep. 76:9-13.) Dragovich believed that Cott's packaging change would improve Slim-Lite's marketability at Sam's Club. (Dragovich Dep. 141:10-142:8.) Cott hoped to introduce the packaging change by January or February 2005. (...