Virginia Imports v. Kirin Brewery

• Decision Date: 18 September 2007
• Docket Number: No. 2400-06-4.,No. 2464-06-4.,04 June 2400,04 June 2464
• Citation: 650 S.E.2d 554,50 Va. App. 395
• Court: Virginia Court of Appeals
• Parties: VIRGINIA IMPORTS, LTD. v. KIRIN BREWERY OF AMERICA, LLC and Virginia Alcoholic Beverage Control Board Kirin Brewery of America, LLC v. Virginia Imports, Ltd. and Virginia Alcoholic Beverage Control Board.

650 S.E.2d 554

50 Va. App. 395

VIRGINIA IMPORTS, LTD. v. KIRIN BREWERY OF AMERICA, LLC and Virginia Alcoholic Beverage Control Board

Kirin Brewery of America, LLC v. Virginia Imports, Ltd. and Virginia Alcoholic Beverage Control Board.

No. 2400-06-4.

No. 2464-06-4.

Court of Appeals of Virginia.

September 18, 2007.

Walter A. Marston, Jr. (Kevin R. McNally, Reed Smith, LLP, on briefs), Richmond, for Virginia Imports, Ltd.

Warwick R. Furr, II (Thomas M. Brownell, Holland & Knight, LLP, on briefs), McLean, for Kirin Brewery of America, LLC.

Carla R. Collins, Assistant Attorney General (Robert F. McDonnell, Attorney General; Francis S. Ferguson, Deputy Attorney General, on brief), for the Virginia Alcoholic Beverage Control Board.

Present: KELSEY and PETTY, JJ., and FITZPATRICK, Senior Judge.

D. ARTHUR KELSEY, Judge.

These consolidated appeals arise out of a franchisor-franchisee dispute governed by the Beer Franchise Act, Code §§ 4.1-500 to 4.1-517. Like most other franchise statutes, the Beer Franchise Act grants franchisees legal rights beyond those consensually conferred by the franchise agreement. Among those statutory rights is a prohibition on breweries "unilaterally" terminating the agreement without proper "notice" under Code § 4.1-506 and "good cause" under Code § 4.1-505. Disputes over the notice and good cause requirements are resolved, at least in the first instance, by the Virginia Alcoholic Beverage Control Board. Appeals of the ABC Board's rulings proceed under the Administrative Process Act, Code § 2.2-4000 et seq., first to the circuit court and then to the appellate courts.

This particular dispute has run its full course once already. In Virginia Imports Ltd. v. Kirin Brewery of America, LLC, 41 Va.App. 806, 589 S.E.2d 470 (2003) (Virginia Imports I), we reversed in part and remanded the circuit court's ruling which, in turn, had reversed the ABC Board's ruling. On remand from Virginia Imports I, the circuit court referred the continuing dispute to the ABC Board for further proceedings consistent with our opinion. The ABC Board rendered another decision; both sides appealed the ABC Board's decision to the circuit court; and both sides have appealed the circuit court's decision to us.

We now affirm.

I.

Kirin Brewery of America, LLC had a distributor agreement with Virginia Imports, Limited, a Virginia beer wholesaler, for over twenty years. Kirin notified Virginia Imports in 1999 of its intent to terminate the agreement because Virginia Imports allegedly had failed to comply with Kirin's policy of beer freshness, improperly sold Kirin beer outside the contractual sales territory, and exhibited substandard sales and service performance. As required by the Beer Franchise Act, Kirin sent a copy of the termination notice to the ABC Board. See Code § 4.1-506(A). According to statute, the notice had to be given at least 90 days prior to Kirin's "intended" termination. Id.

The Beer Franchise Act allowed the wholesaler-franchisee, Virginia Imports, to render the brewery's termination notice "void and without legal effect" by curing the conditions supporting the notice and by giving a written response to the termination notice letter within 60 days with a copy of the response letter mailed to the ABC Board. See Code § 4.1-506(B). Virginia Imports sent Kirin its response letter a day after the expiration of the 60-day deadline but neglected to send a copy to the ABC Board. Kirin, however, requested a hearing seeking a determination from the ABC Board that it had good cause to terminate the agreement.

The Secretary of the ABC Board, unaware that Virginia Imports had responded (albeit a day late) to Kirin's termination notice, wrote Kirin a letter. "Our records indicate," the Secretary advised Kirin, that "your company gave notice to Virginia Imports, Ltd., of your intent to terminate your agreement" with Virginia Imports. "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." As a consequence, the Secretary concluded, the agreement "was effectively terminated" ninety days after Kirin's termination notice. The Secretary ended his letter with the assurance that "Kirin is free to appoint other distributors" in place of Virginia Imports.

The day after receiving the Secretary's letter, Kirin entered into a new franchise agreement with another distributor. Kirin did not notify the ABC Board of Virginia Imports's response letter. Nor was Virginia Imports informed of its mistake in not sending a copy of its response letter to the ABC Board.

After receiving the Secretary's letter, Virginia Imports requested reinstatement of the distributor agreement based upon the mistake. The ABC Board refused to reinstate the franchise but held nonetheless that no good cause justified Kirin's termination of the agreement. Based on that finding, the ABC Board ordered Kirin to compensate Virginia Imports for the value of the terminated agreement. See Code § 4.1-508(A) (authorizing monetary remedies in addition to reinstatement). Finding Kirin to have acted in "bad faith," the ABC Board also ordered Kirin to pay Virginia Imports's attorney fees. See Code § 4.1-509.

Kirin appealed to the circuit court pursuant to the Virginia Administrative Process Act, Code § 2.2-4026. In a cascading series of alternative rulings, the circuit court held first that the ABC Board had no authority to decide the case. It lacked authority because Virginia Imports failed to mail its response letter to the ABC Board within 60 days or to request a hearing within 90 days as the notice statute required. That procedural default, the circuit court held, precluded the ABC Board from adjudicating any aspect of the dispute.

"Even if the Board were authorized to adjudicate the matter," the circuit court further held, it "erred in determining that Kirin terminated the agreement." Kirin Brewery of Am., LLC v. Va. Imps., Ltd., 60 Va. Cir. 151, 157-58 (Fairfax County 2002) (emphasis added). The franchise was "terminated by operation of law," id., the court stated, just as the Secretary's letter implied. "Kirin itself did not terminate or cancel its agreement with Virginia Imports," id., the court concluded.

"Even if Kirin had terminated" the agreement, the circuit court again held in the alternative, the administrative record did not support the ABC Board's determination that no good cause existed to terminate the agreement. Id. at 158 (emphasis added). The court found that the ABC Board's decision focused only on one good-cause allegation (the stale-beer complaint) and ignored the other grounds Kirin asserted in its notice of termination.

Finally, the circuit court rejected the ABC Board's award of attorney fees. The record, the court stated, could not support the conclusion that Kirin acted in bad faith because Kirin merely relied on the Secretary's letter, which correctly spoke of the distributor agreement being "effectively terminated" as a matter of law. Kirin's reliance on the Secretary's letter, the court reasoned, could not be characterized as bad faith.

Virginia Imports appealed. A panel of this Court held that Virginia Imports's "failure to mail a copy of its cure notice to the ABC Board under Code § 4.1-506(B) or request a hearing under Code § 4.1-506(D)" created no jurisdictional defect divesting the ABC Board of jurisdiction. Virginia Imports I, 41 Va.App. at 826, 589 S.E.2d at 480. The panel agreed with the circuit court that the ABC Board erred by addressing only one of Kirin's purported causes for termination (the stale-beer allegation). The panel concluded, however, that the proper remedy was for the circuit court to remand the case back to the ABC Board for consideration of the other good-cause grounds asserted by Kirin. Id. at 831-32, 589 S.E.2d at 482-83. Finally, on the issue of attorney fees, the panel affirmed the circuit court's holding that Kirin did not act in bad faith in terminating the distributor agreement.

The panel's ruling briefly addressed the circuit court's alternative holding that Kirin never terminated the agreement because it was extinguished by operation of law. The subject, however, came up only in the portion of the opinion addressing the ABC Board's authority to examine Kirin's good-cause reasons for issuing its termination notice. As the panel noted:

Kirin argues the circuit court correctly held that, because Virginia Imports failed to comply with the mailing requirement of Code § 4.1-506(B) or request a hearing under Code § 4.1-506(D), the distributorship agreement between Kirin and Virginia Imports ended by operation of law ninety days after Kirin sent its August 3, 1999 termination letter to Virginia Imports. Thus, Kirin argues, the ABC Board did not have authority to hold hearings and render a decision in this case.

Virginia Imports I, 41 Va.App. at 820, 589 S.E.2d at 477 (emphasis added).

Rejecting this thesis, the panel overturned the circuit court's principal holding that the ABC Board lacked authority to adjudicate the good-cause issue and ordered the ABC Board on remand to examine the good-cause grounds asserted by Kirin that had not been previously ruled upon in the administrative process. The panel opinion defines the scope of the remand this way:

Accordingly, we . . . remand this matter to the circuit court for remand to the ABC Board with instructions to consider, upon the existing evidentiary record, all of the deficiencies asserted by Kirin in its August 3, 1999 letter, except the deficiency already addressed and ruled upon relating to Kirin's freshness policy, and to determine with respect to each of those previously unaddressed deficiencies whether Kirin satisfied its burden of proving it had good cause to terminate the subject distributorship agreement.

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