Whitman's Candies, Inc. v. Pet Inc.

• Decision Date: 02 June 1998
• Docket Number: No. WD,WD
• Parties: WHITMAN'S CANDIES, INC., Respondent. v. PET INCORPORATED, Appellant. 54041.
• Court: Missouri Court of Appeals

Page 519

974 S.W.2d 519

WHITMAN'S CANDIES, INC., Respondent. v. PET INCORPORATED, Appellant.

No. WD 54041.

Missouri Court of Appeals,

Western District.

June 2, 1998.

Motion for Rehearing and/or Transfer to

Supreme Court July 28, 1998.

Application to Transfer Denied

Sept. 22, 1998.

Bernard J. Rhodes, Kansas City, for Respondent.

Robert L. Ward, Kansas City, for Appellant.

Before BRECKENRIDGE, P.J., and LOWENSTEIN and SPINDEN, JJ.

LOWENSTEIN, Judge.

This case involves the interpretation and breach of a contract--the Assets Purchase Agreement ("the Agreement")--in which defendant and appellant Pet, Inc. ("Seller") agreed to sell the assets of its Whitman's Chocolates Division to plaintiff-respondent, a newly-formed corporation called Whitman's Candies, Inc. ("Buyer"). This action is by Whitman's, the Buyer, against Pet, the Seller, for breach of contract.

The facts, as indicated by the record and viewed in the light most favorable to the verdict, are as follows. In 1992, Pet, a large food company, decided to sell its Whitman's chocolates division, which made and sold boxed chocolates under the well-known "Whitman's" name. After learning of Pet's desire to sell its Chocolates Division, Louis Ward, who was then president of Russell Stover Candies, and his two sons, Tom and Scott, both of which were involved in the candy business at Russell Stover,considered purchasing Pet's chocolates division for Russell Stover Candies. ¹ After much contemplation, the Ward family decided that the two sons, along with their sister, would form a separate corporation for the purpose of purchasing the assets of Pet's chocolates division, in order to avoid increased estate taxes for Louis Ward. That corporation, Whitman's Candies, Inc., was the actual purchaser of the assets and is the other party, along with Pet, to the Agreement. ² In other words, Whitman's chocolates were originally made by Pet; then Pet decided to get out of the candy business. Russell Stover, who also made chocolate candies, decided to buy the Whitman's name and assets from Pet. Russell Stover then formed a corporation, Whitman's Candies, Inc., to purchase and run the Whitman's operation.

The Agreement, which governed the rights, responsibilities, and conduct of both parties with regards to the sale of Seller's chocolates division to Buyer, was dated March 5, 1993. The parties agreed on a purchase price of $13.5 million for Seller's assets, of which one million was allocated to the purchase of the Whitman's trademark. Because Seller had sold all its rights to the Whitman's name, Seller could not sell its existing inventory of candy without permission from Buyer. Anticipating this situation, the parties inserted a provision into the Agreement, specifically § 8.2, which allowed Seller to continue to operate their chocolate division during a winding-down period ³ until all of Seller's existing inventory was sold. Seller stopped making boxed chocolates in May of 1993 and completed selling its inventory by the end of 1993. Section 8.2 further provided that Seller could only sell its existing inventory so long as, during the Reservation of Rights period, it did "not make or institute any unusual or novel methods of manufacture, purchase, sale or operation that will vary materially from those methods previously used by Seller" and that Seller would "use its best efforts to maintain the goodwill and reputation associated with the [t]rademarks."

At trial, the evidence established that at the time the Agreement was signed, Seller had a policy in place to insure that only fresh candy was sold to the public by buying back out-of-date candy from retailers at 50% of its cost. Testimony revealed that such a policy is "standard in the box chocolate business," and that Seller's use of this policy was "extremely important" to Buyer at the time of the purchase. Specifically, Seller's own "Policy Governing Adjustment on Returned Goods," or freshness policy, provided that retailers should remove candy from their shelves that was one year old, damaged, or stale, and that Seller would credit the retailer 50% of the retailer's cost for doing so. Retailers could receive this credit in the form of a check or as a credit against future invoices.

However, during the Reservation of Rights period Seller discontinued its longstanding freshness policy and told retailers that all sales of candy after July 1, 1993, would be "final." Retailers were informed by Seller that candy they bought from Seller after this date would no longer be eligible for a 50% credit if it became outdated. To compensate for this change in policy, Seller sold the "final sale" candy to retailers at a discount. The practical effect of this change in policy was that many retailers would leave outdated candy on their shelves rather than replacing it with fresh candy because they did not want to take a total loss for the old candy.

At trial, Buyer sued Seller for breach of contract in three counts. Count I sought $264,000 for Seller's failure to indemnify Buyer for the credits retailers took against Buyer's invoices when the retailers removed outdated Seller-manufactured candy from their shelves. Count II sought $364,000 for display racks that Buyer claimed it had purchased and that Seller had improperly sold to retailers during the Reservation of Rights period. Count III sought to recover lost profits resulting from a breach by Seller when they discontinued their policy of monitoring for outdated, spoiled, or defective candy and offering a 50% credit to retailers for such candy.

The case was tried to a jury, which awarded Buyer $264,000 on the indemnity claim, $364,000 on the display rack claim, and $3 million in lost profits. The trial judge entered judgment in these amounts and awarded plaintiff $236,611 in attorney fees pursuant to § 10 of the Agreement.

Indemnity Claim

When Buyer's representatives began selling their own Buyer-manufactured boxed chocolates to retailers, they informed retailers that the Seller-manufactured candy was outdated and should be removed from their shelves. In response to Buyer's comments, some retailers did remove the candy from their shelves. In addition, many retailers took a 50% credit for the outdated Seller-manufactured candy against the next invoice retailers received from Buyer. Buyer sought reimbursement for these credits under § 9.1 of the Agreement, which provided that Seller would indemnify Buyer for "any liabilities or obligations of, or claims against, all or any portion of the Business arising out of or relating to" the Reservation of Rights period. Seller regularly reimbursed Buyer for these claims for 14 months. However, after June 18, 1994, Seller stopped reimbursing Buyer for the credits, claiming that, under § 9.2(c) of the Agreement, Buyer had to notify Seller of any claims for indemnification by June 18, 1994. At trial, the parties stipulated that the unreimbursed credits for claims submitted to Seller after June 18, 1994, totaled $264,658.

Lost Profits Claim

Without objection by Seller, evidence was introduced at trial showing that more than 400,000 boxes of outdated chocolates manufactured by Seller had been sold in the United States since Seller discontinued its freshness policy. In response to their purchase of Seller's stale, outdated candy, numerous retail consumers wrote letters stating, among other things, that they "had to throw away the entire box," that the chocolates were "old and stale," and that they were "never going to buy Whitman candy again."

Buyer called Dr. Richard Oliver, a consumer psychologist, to testify as to his expert opinion on the number of dissatisfied consumers who would now refuse to buy candy sold under the Whitman's name. Dr. Oliver, having spent more than twenty years studying consumer response, testified that the process he used in arriving at his opinion was generally accepted within the consumer satisfaction field. Using published studies of consumer behavior and market research, Dr. Oliver determined that Buyer would lose sales of 2.711 million boxes of candy over a three year period. In Dr. Oliver's opinion, three years was the "average" period of time a buyer would go before purchasing a box of Whitman's chocolates again. Dr. Oliver multiplied the lost sales of 2.711 million boxes of chocolates by Buyer's per box profit margin of $1.79, and concluded that Buyer was damaged in the amount of $4,852,690 as a result of the sale of the 400,000 boxes of stale and outdated Seller-manufactured candy. Tom Ward, president of Buyer, testified that for every box of chocolates Buyer sells they make $1.79 profit.

Display Racks Claim

As part of the purchase price, Buyer bought certain display racks that retailers used to display Whitman's Candy. Section 2.1 of the Agreement defined what assets were included in the purchase price and included "all display racks" located at the plant as set forth in Schedule 4.7. Schedule 4.7 listed the "Other Tangible Assets being purchased by the Buyer, subject to modification pursuant to § 8.1" and included "all display racks" as well. Buyer introduced evidence that on or about the day of closing, Seller had $612,612 worth of display racks at its plant. Buyer also introduced evidence that Seller only delivered racks worth $248,426, and argued that Seller owed Buyer $364,186 for the undelivered display racks.

Submissibility of Lost Profits Claim

In its first point on appeal, Seller argues that the trial court erred in submitting Buyer's claim for lost profits to the jury because: (a) the lost profits claim depended upon the Agreement imposing a continuing duty upon Seller to remove outdated Seller candy from retailers' shelves, and no such duty existed in the Agreement; and (b) Buyer failed to introduce evidence of past profitability or of actual costs or expenses of its business.

In reviewing the submissibility of a case, this court views the evidence in the light most favorable to the...