Virginia Imports v. Kirin Brewery of America

• Citation: 296 F.Supp.2d 691
• Decision Date: 08 December 2003
• Docket Number: No. CIV. 03-928-A.,CIV. 03-928-A.
• Parties: VIRGINIA IMPORTS, INC., Plaintiff, v. KIRIN BREWERY OF AMERICA, LLC, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

296 F.Supp.2d 691

VIRGINIA IMPORTS, INC., Plaintiff, v. KIRIN BREWERY OF AMERICA, LLC, Defendant.

No. CIV. 03-928-A.

United States District Court, E.D. Virginia, Alexandria Division.

December 8, 2003.

George E. Kostel, Esquire, Reed Smith, LLP, Richmond, VA, for Plaintiff.

Warwick Rex Furr, II, Esquire, Holland and Knight, McLean, VA, for Defendant.

MEMORANDUM OPINION

CACHERIS, District Judge.

Plaintiff brings this action to recover on claims of fraud and constructive fraud. It alleges that the Defendant committed fraud or constructive fraud in its policies and actions during its termination of the agreement between the parties under Virginia's Beer Franchise Act. Defendant moves to dismiss this action or in the alternative for summary judgment. The Court holds the following: (1) the Plaintiff's cause of action is not preempted by the Beer Franchise Act; and, (2) the action is barred by Virginia's statute of limitation for fraud actions.

I. Background

A. Factual Background

Plaintiff Virginia Imports ("VI") is a Virginia corporation and a state-licensed beer and wine distributor. Defendant Kirin Brewery of America LLC ("Kirin") is a Delaware limited liability company, with its principal place of business in Santa Monica, California. Kirin's parent company is a Japanese brewery. The following background information is drawn from an opinion by Judge Roush of the Circuit Court of Virginia, Fairfax County, which sets forth the relevant facts. See Kirin Brewery of America, LLC v. Virginia Imports Ltd., 2002 WL 31188497, *1-3 (Va. Cir. Ct.2002). Virginia's Beer Franchise Act (the "BFA") regulates the business relationships between beer manufacturers and local beer wholesalers. The BFA governs sales territories, distributorship contracts, the performance of distribution agreements, and the amendment or termination of such agreements. The BFA defines an agreement as "a commercial relationship not required to be evidenced in writing of definite or indefinite duration between a brewery and a beer wholesaler pursuant to which the wholesaler has been authorized to distribute one or more of the brewery's brands of beer." Va.Code Ann. § 4.1-500.

Since 1979, Kirin and VI have had an "agreement" under the BFA. Under the agreement, VI held the exclusive rights to distribute certain Kirin products in licensed retail establishments in northern Virginia. Both parties performed the agreement for close to 20 years without any apparent problems.

In 1996, Kirin formed a strategic alliance with Anheuser-Busch, Inc.("AB") to make and sell Kirin Brewery's beers in the United States. See Financial Digest, Wash. Post, June 6, 1996, at D9. Shortly thereafter, Kirin announced its intention to transfer the rights to distribute Kirin products from its existing distributors, like VI, to distributors that were part of the existing AB network. (Compl. ¶ 9.)

In 1999, Kirin made a series of monetary offers to VI to buy out the agreement between the parties, thereby allowing Kirin to transfer the rights to AB. VI rejected these offers.

Only days after VI rejected Kirin's final offer, Kirin began complaining about VI's performance of the Agreement. VI alleges that Kirin "concocted a ruse to make Kirin's termination of VI appear to comply with the Franchise Act, and embarked upon a campaign to build an artificial record of `non-performance' in order to justify the termination." (Compl. ¶ 12.) Thirty days after Kirin's final offer was refused, Kirin informed VI that it had a "freshness policy." This policy required that VI remove from store shelves all Kirin products over 180 days past their "born-on-date." VI maintains that the "freshness policy" was merely a pretext to impose impossible conditions upon VI and to provide an excuse for statutory termination. At the same time, Kirin maintained a 270-day freshness policy for its beer in Japan.

In April 1999, Kirin demanded that VI comply with the freshness policy by May 1. After discussions, the parties agreed that the time limit was too short. Kirin allotted VI 120 days to comply with the freshness policy. However, on August 3, 1999—nearly four weeks prior to the date set by the parties—Kirin sent VI the statutorily required notice of its intent to terminate the agreement. See Va.Code Ann. 4.1-506. Kirin described several grounds for the termination, including VI's failure to remove out-of-code beer (i.e. beer 180 days past its "born on date") from the shelves. Kirin complied with Code § 4.1-506(A) by sending a copy of the termination letter to the Alcoholic Beverage Control Board ("ABCB" of "the Board").

VI sent a cure letter to Kirin, on October 4, 1999, asserting that it had corrected the problems cited in the termination letter. However, VI did not notify the Board that it was attempting to cure the deficiencies Kirin identified as the BFA required. See Va.Code § 4.1-506(B) ("[a] copy of the notice shall be mailed at the same time to the Board.").

On October 22, 1999, having received VI's cure letter, Kirin requested a hearing before the Board pursuant to Code § 4.1-506(D) on the issue of whether VI had cured the deficiencies and whether Kirin had "good cause" to terminate the distributorship. In its October 22, 1999 letter, Kirin expressed its continued dissatisfaction with "out-of-code beer and ... [VI's] poor service." See Kirin, 2002 WL 31188497, at *1.

The Secretary of the Board (the "Secretary"), by letter of February 9, 2000, wrote Kirin as follows:

Our records indicate that by letter dated August 3, 1999, your company gave notice to VI, Ltd., of your intent to terminate your agreement designating VI, Ltd., as the wholesale distributor of Kirin brands in certain territories in Virginia. More than ninety days have now passed since that notice, and we have received neither a notice from the wholesaler that it has taken action to rectify the conditions constituting the reason for the termination, nor a request for a hearing on the issue of reasonable cause. Therefore, under the provisions of the Beer Franchise Act, the agreement between Kirin and VI, Ltd., was effectively terminated ninety days after the August 3, 1999, notice.

Kirin is free to appoint other distributors for the territories formerly held by VI, Ltd.

(Def.Mem.Ex. A.) Kirin wrote to the Secretary on February 10, 2000, designating AB as Kirin's distributor for Virginia.

The Secretary denied VI's request that he temporarily suspend the effectiveness of his February 9, 2000 letter. Similarly, the Board refused to reinstate the distributorship agreement between Kirin. Kirin, 2002 WL 31188497, at *2.

B. Procedural History

In February 2000, VI protested the Secretary's actions. On April 17, 2000, the Secretary referred the matter for a hearing. The hearing panel found that the primary reason advanced by Kirin for its termination of the agreement was VI's failure to comply with Kirin's freshness policy. Id. The hearing panel concluded that a freshness policy could be reasonable, but Kirin had enforced their in an unreasonable manner. The hearing panel, therefore, concluded that Kirin failed to prove that it imposed a "reasonable and material requirement" on the wholesaler as required by Code § 4.1-505 and that "good cause" existed for its termination of the agreement. The hearing panel held that, even if Kirin's freshness policy were reasonable, VI had substantially complied with the policy. The hearing panel concluded that Kirin acted in bad faith in terminating the agreement because, inter alia, Kirin only began visiting retail accounts and finding out-of-code beer after VI repeatedly refused Kirin's offers to purchase the distribution rights for Kirin beer. The hearing panel reasoned that a brewery cannot have good cause for termination in the absence of good faith.

Both parties appealed the hearing panel's decision to the Board. On September 26, 2001, the Board issued its Final Order. The Board overruled the hearing panel's decision in part, finding that Kirin had instituted a reasonable freshness policy for its products and noting that:

The hearing panel appears to adopt a theory that a brewery terminating a franchise agreement is guilty of bad faith under the Beer Franchise Act if it possesses a motive which does not amount to good cause for termination under the Act, even if it has made reasonable and material requirements with which the wholesaler has not substantially complied. The Board does not adopt this interpretation of the Act's requirements.

(Def. Mem. Ex. E at 3.) The Board found that VI substantially complied with Kirin's freshness policy and that Kirin lacked good cause to terminate VI. The Board further found Kirin guilty of bad faith "in proceeding to terminate its agreement with VI in February, 2000, even though it was on notice that VI had claimed to have taken corrective action with respect to all the causes for termination." (Id.) As a remedy, the Board ordered Kirin to pay VI's reasonable costs and attorney's fees. (Id.)

Kirin appealed the Board's order to the Circuit Court of Virginia. See Kirin, 2002 WL 31188497. Judge Roush overturned the Board's ruling, holding that the Board erred in concluding that Kirin acted in bad faith and that it "reasonably relied upon an official communication from the Secretary of the Board." Id. at *7.

VI filed this case on June 5, 2002. VI alleged that Kirin committed actual and constructive fraud upon both VI and the Board. (Compl.¶ 30.) On July 21, 2003, Kirin removed the case from state court. On September 10, Kirin moved for judgment on the pleadings, or in the alternative for summary judgment. The Court heard oral argument on October 31, 2003 and took the matter under advisement. This motion is currently before the Court.

II. Standard of Review

Pursuant to Rule 12(c), a party may move for judgment on the pleadings "[a]fter the pleadings are closed but within such time as not to delay the trial." Fed. R.Civ.P. 12(c). The pleadings are...