Posts Tagged ‘Beer Law’

Mandated Arbitration Does Not Create a “Protected Activity”


A decision that involves both beer and anti-SLAPP law is right up my alley, so I had to bring you the details of Mission Beverage Company v. Pabst Brewing Company, LLC out of the Second District.

The importance of this case is the lesson it teaches in focusing on whether the conduct in question is indeed “protected activity” such that it satisfies the first prong of the anti-SLAPP analysis. As I have stated here before, the scope of the anti-SLAPP statute has grown and grown, but attorneys must not give short shrift to the first prong.

I. Facts

Defendant and appellant Pabst Brewing Company, LLC (Pabst) is a brewer of beers; among others, Pabst brews such American classics as Pabst Blue Ribbon (a beer I will occasionally enjoy on a hot day), Colt 45 Malt Liquor (good only for cleaning spark plugs), Old Milwaukee (not as bad as Budweiser, but something I would drink only if I had not had a cold beer for over a year and nothing else was available), Schlitz (I don’t recall if I liked it), and Stroh’s (I’ve never tried it).

In January 2009, Pabst entered into a written Distributor Agreement (Agreement) with Mission Beverage Company (Mission). Pabst granted Mission the exclusive right to distribute many of its beers within specifically delineated boundaries within Los Angeles County. In turn, Mission promised to “aggressively promote, encourage, and increase” the sales of, and “customer satisfaction” with, those beers. The parties’ powers to terminate the contract were not the same: Mission could terminate the contract with 60 days’ notice and irrespective of cause, while Pabst could terminate the contract only for one of ten enumerated reasons and then only if it gave Mission an opportunity to cure. One of those ten reasons, memorialized in section 8.2.10 of the Agreement, permits Pabst to terminate the Agreement if Pabst has a “right to terminate” under “applicable state or federal law, statute or regulation.” The Agreement also provides that any and all litigation should occur in court, and contemplates that Mission recover attorney’s fees if it prevails in litigation against Pabst.

In November 2014, Pabst came under new ownership. Three months later, in February 2015, Pabst sent Mission a letter “commencing termination” of the Agreement “pursuant to section 25000.2 and Section 8.2.10 of the Agreement.” Pabst stated that Classic Distributing & Beverage Group, Inc. (Classic) and Beauchamp Distributing Company (Beauchamp) would be replacing Mission as Pabst’s distributor. (I’m sure that would hurt from an economic standpoint, but I have to believe there would be some relief in no longer having to purvey Colt 45 Malt Liquor.) Pabst did not cite any other basis for terminating the Agreement.

The liquor industry is highly regulated, and section 25000.2 provides that when a brewer who acquires the right to manufacture beer “cancels an existing beer wholesaler’s rights to distribute a product,” that successor brewer’s designated replacement distributors must negotiate in good faith – and, failing that, arbitrate – with the existing distributor “to determine the fair market value of the affected distribution rights.” Pretty sweet protection. The brewer can fire you, but you get the fair market value for the distribution rights. Adhering to these procedures, Pabst’s designated distributors tried to negotiate with Mission, but Mission would not go quietly into that good night. It would not agree to a price so in March 2015, Pabst’s sent Mission a letter initiating arbitration.

II. Procedural Background

The following month, Mission responded by suing Pabst for (1) breach of contract, and (2) declaratory relief. Specifically, Mission alleged that Pabst breached the Agreement by “attempting to terminate” the Agreement on the basis of section 25000.2, which did not “provide an independent right to terminate ” Mission also sought a declaration that there was no valid “termination” of the Agreement.

So that left Mission with two litigation fronts – the arbitration and the litigation. Mission made several attempts to halt the ongoing arbitration between itself and Pabst’s newly designated distributors, all to no avail. Mission made an ex parte motion to stay the arbitration, but that motion was denied “without prejudice” to filing a noticed motion. Mission thereafter filed a noticed motion, but that motion was also denied. Not deterred, Mission also asked the arbitrator to dismiss the arbitration, but the arbitrator refused.

The arbitrator issued a final award in October 2015. In the award, the arbitrator made clear that his order “contained no findings, declarations or damages determinations regarding Mission’s pending civil cause of action that Pabst breached the Agreement.” This is an important point, because it made clear that the arbitrator viewed the arbitration and litigation as separate and distinct, with different issues presented. But as to the arbitration, the arbitrator fixed the fair market value of the distributorship rights conferred by the Agreement. Mission did not appeal the award, and Classic and Beauchamp thereafter paid Mission the amount fixed by the arbitrator.

For its part, Pabst refused to recognize the distinction being made by the arbitrator, and filed a motion to strike Mission’s lawsuit under the anti-SLAPP statute. Pabst argued that the “linchpin” of Mission’s lawsuit was Pabst’s “invocation of the statutorily-mandated arbitration process under section 25000.2,” which Pabst asserted was “protected activity” under the anti-SLAPP statute. Pabst further contended that Mission’s lawsuit lacked minimal merit because no “legally viable or non-duplicative remedy” remained once Mission had accepted the payment reflecting the fair market value of its distributorship rights from Classic and Beauchamp.

The theory was not as crazy as it may appear at first blush. Remember, “protected activity” under the anti-SLAPP statute includes activities related to “official proceedings” such as “statutorily required arbitration.” This wasn’t some contract requiring arbitration, but rather was a statutory scheme that forced arbitration, and here Mission was suing Pabst for following that mandated process, according to Pabst’s argument.

But the trial court disagreed and denied the anti-SLAPP motion. It concluded that Mission’s lawsuit was separate and distinct from the arbitration: The lawsuit was “for breach of the contract between Mission and Pabst,” while the arbitration was “between the distributors,” and the primary issue in the lawsuit – “whether the Agreement was validly terminated” – is “an issue separate from (and prerequisite to) the arbitration, not part of it.”

Despite the seemingly clear logic of the trial court’s conclusion, and the obvious problems that will be discussed below, Pabst appealed.

III. A Primer on Beer Law

To fully understand the reasoning of the Trial Court and Court of Appeal, a primer on beer law is required. The Alcoholic Beverage Control Act (Act) divides up the distribution chain for alcohol into three tiers – namely, (1) “manufacturers,” (2) “wholesalers” or distributors, and (3) “retailers”; and generally prohibits each from having an ownership interest in the others.

Section 25000.2 dictates the procedures to be followed when a “successor beer manufacturer acquires the rights to manufacture” held by a brewer, and then “cancels any of the [brewer’s] existing beer [distributor’s] rights to distribute the product.” The successor brewer “cancels” a distribution contract if it “terminates, reduces, does not renew, does not appoint or reappoint, or causes any of the same.” The pertinent procedure is as follows. First, the successor brewer must “notify” the existing distributor of its “intent to cancel any of the existing distributor’s rights to distribute the product.” Second, the entity the new brewer wants to be its new distributor – whom the Act calls the “successor beer manufacturer’s designee” – is required to “negotiate in good faith” with the existing distributor to “determine the fair market value of the affected distribution rights.” “Fair market value” is defined as “all elements of value, including, but not limited to, goodwill.” If the existing distributor and the successor brewer’s preferred distributor can “agree to the fair market value,” then the successor brewer’s preferred distributor “shall compensate the existing” distributor “in the agreed amount.” If they “are unable to mutually agree,” then the successor brewer’s preferred distributor “shall initiate arbitration to determine the issue of compensation for the fair market value of the affected distribution rights” following the time lines set forth in the statute, and if the existing distributor does not appeal the arbitration award, the successor brewer’s preferred distributor must pay the existing distributor that amount.

IV. Analysis

A. What conduct is the basis for the challenged claim(s), and does that conduct constitute protected activity?

Pabst argued that the trial court erred in concluding that Mission’s breach of contract and declaratory relief claims did not arise from protected activity because (1) those claims are based upon Pabst’s letter purporting to cancel the Agreement, and (2) that letter invokes section 25000.2’s procedures and is accordingly preparatory to statutorily mandated arbitration, which constitutes an official proceeding within the meaning of Code of Civil Procedure section 425.16, subdivision (e)(1) and (2).

1. What conduct by Pabst is Mission challenging?

A claim is subject to the anti-SLAPP statute only if conduct constituting protected activity “itself is the wrong complained of.” Park, 2 Cal.5th at p. 1060. Thus, where a plaintiff’s claim is based upon “an action or decision” of the defendant, it is not enough that some protected activity by the defendant precedes that action or decision, that some protected activity is the means of communicating that action or decision, or that some protected activity constitutes evidence of that action or decision. To fall under the anti-SLAPP statute, the challenged action or decision itself must be protected activity.

This is where so many attorneys go wrong. As occurred here, the attorney will see that a mandated action precipitated the complaint, and therefore jump to the conclusion that the complaint is arising from that protected activity. Close, but no cigar. The attorney needs to take one more baby step back to get a slightly larger view of the issue. The protected activity may be what lead to the complaint, but it does not necessarily follow that the complaint is challenging the protected activity. Where a plaintiff’s claim attacks only the defendant’s decision to undertake a particular act, and if that decision is not itself protected activity, that claim falls outside the ambit of the anti-SLAPP statute.

For example, in Park (above), the California Supreme Court held that the anti-SLAPP statute did not apply to a claim challenging a university’s decision to deny tenure to a professor, even though the decision was communicated in writing and even though the university dean’s comments supplied evidence of discriminatory animus. In Ulkarim v. Westfield LLC (2014) 227 Cal.App.4th 1266, 1275-1276, 1279, the court held that the anti-SLAPP statute did not apply to a claim challenging a landlord’s decision to terminate a tenancy, even though the landlord subsequently served a notice to quit and filed an unlawful detainer lawsuit. And in McConnell v. Innovative Artists Talent & Literary Agency, Inc. (2009) 175 Cal.App.4th 169, 176-177, the court held that the anti-SLAPP statute did not apply to a claim challenging an employer’s decision to wrongfully terminate employees, even though the employer later sent a letter terminating those employees. Only when the decision that the plaintiff attacks is itself protected activity will the anti-SLAPP statute apply.

In this case, Mission’s breach of contract and declaratory relief claims challenge Pabst’s decision to terminate the Agreement. That is because both claims challenge Pabst’s right to terminate the Agreement and, in particular, Pabst’s assertion that section 25000.2 provides such a right. Pabst’s subsequent letter merely communicated Pabst’s decision to terminate, but “that communication does not convert [Mission’s] suit into one arising from such speech.” (Park, supra, 2 Cal.5th at p. 1068.)

2. Is that conduct protected activity?

The Court of Appeal properly concluded that Mission’s claims did not involve protected activity for two reasons. First, Mission’s claims are based upon Pabst’s decision to terminate the Agreement – not Pabst’s subsequent letter communicating that decision. That decision precedes and is unconnected with any official proceeding. Second, that letter did not qualify as protected activity. Although section 25000.2’s mandatory arbitration undoubtedly qualifies as an official proceeding under the governing precedent, Pabst’s letter is not preparatory to such an arbitration. That is because section 25000.2 first contemplates that the existing distributor and successor brewer’s designated distributors negotiate in good faith and resort to arbitration only if negotiations fail. Like the insured who files a claim not knowing whether the insurer will pay the claim or fight the claim in litigation, Pabst had “no reason to believe” that arbitration “will follow” from its letter because Mission, Classic, and Beauchamp could well have negotiated a settlement and obviated any need for arbitration.

B. Do Mission’s Claims Have Minimal Merit?

Since the first prong of the anti-SLAPP analysis was not met, the second prong becomes moot, but for fun let’s analyze that as well.

Pabst argued that Mission’s two claims lacked the minimal merit necessary to withstand its anti-SLAPP motion. Specifically, Pabst asserted that Mission could not prove (1) any breach of contract because section 25000.2 independently confers upon brewers a right to terminate a distribution contract, or (2) any damages arising from any breach because Mission was made whole by Classic’s and Beauchamp’s payment reflecting the fair market value of Mission’s distribution rights. Because any breach of contract claim requires proof of a contractual duty, breach of that duty, causation, and damages, and because Mission’s declaratory relief claim that there was no valid termination in effect seeks a declaration that Pabst breached the contract, Mission was required to make out a prima facie case that Pabst breached the Agreement and that Mission was damaged by that breach.

The trial court did not bother to analyze the second prong, but the Court of Appeal took the opportunity, as permitted by Schwarzburd v. Kensington Police Protection & Community Services Dist. Bd. (2014) 225 Cal.App.4th 1345, 1355 and Roberts v. Los Angeles County Bar Assn. (2003) 105 Cal.App.4th 604, 615-616), on the grounds that an analysis of section 25000.2 was important.

1. Has Mission made a prima facie showing that Pabst breached the Agreement?

Because Pabst’s termination of the Agreement rested solely on its position that section 25000.2 confers upon brewers an independent right to terminate a distribution contract, whether Mission has made out a prima facie case for the element of breach turns on whether section 25000.2 confers such a right. This is a question of statutory interpretation, which the court reviewed de novo. (Weatherford v. City of San Rafael (2017) 2 Cal.5th 1241, 1247.)

It concluded that the text of section 25000.2 sets forth the procedures that must be followed when a “successor beer manufacturer acquires the rights to manufacture a product” and “cancels any of the existing distributor’s rights to distribute the product.” The statute prescribes what happens after the successor brewer cancels, but nothing in the statute’s text expressly grants the successor brewer the precursor right to cancel distribution rights. More to the point, nothing in the statute’s text expressly grants the successor beer manufacturer the further right to cancel distribution rights regardless of its contractual obligations with the existing distributor.

Nor could the Court infer an implied right to cancel distribution contracts – with or without impunity – from section 25000.2’s legislative history.

“To begin, section 25000.2 was sponsored by the California Beer and Beverage Distributors. It seems highly unlikely that an organization representing distributors would sponsor legislation that would deprive their members of their negotiated contractual rights. Moreover, section 25000.2 was enacted to address a specific problem: Brewers were buying up and consolidating more and more brands of beer and then seeking to use their own network of distributors, so there was a need for “an authorized and structured process to insure the timely payment of fair and market-based compensation for the transfer of brands between” distributors. Solving this problem does not require brewers to be granted an unvarnished right to terminate their distributorship contracts.”

Thus, Pabst’s argument was built entirely on a false premise. It claimed that having notified Mission that its rights were being terminated, arbitration naturally followed, and both were protected activities. But it still remained to be determined if Pabst had the right to terminate to begin with under the terms of the Agreement.

The Court goes on to list several more reasons that Pabst’s argument fails, but one in particular was the sort that before I was through the first pages of the decision, I was scratching my head wondering how Pabst could not see this point or chose to ignore it.

Pabst argued that section 25000.2 must be read to foreclose any lawsuit by an existing distributor against the brewer because such a lawsuit will always be either unripe or moot. Here was the reasoning of Pabst, which can be a little difficult to follow.

Under the scheme of section 25000.2, at least as Pabst interpreted it, (1) the termination notice is sent, (2) but the original distributor goes right on distributing until, (3) the new distributor pays the fair market value for the distributorship, whether that number is determined by agreement or arbitration. Thus, according to Pabst, there is no harm no foul to the prior distributor. It continued to make its profits up to the time it was paid in full for the distributorship.

I’m sure you begin to see the flaws in that argument. By that reasoning, no business is harmed by an unauthorized takeover, so long as it is paid the fair market value of the business.

According to the reasoning of Pabst, once the distributor is paid, any lawsuit instantly becomes moot because the payment makes the distributor whole and makes any declaratory relief redress for a “past wrong.”

The Court of Appeal saw the flaws as well, finding that Pabst was incorrect that a distributor’s claim for breach of contract is not ripe as long as it continues to distribute the brewer’s beer because, quite simply, the distributor may sue for anticipatory breach. It also concluded that Pabst was incorrect in arguing that a distributor’s claim is moot once the newly designated distributors remit the fair market value of the distribution rights because, additional damages may be available if there is a wrongful breach and there remains a live “actual controversy” warranting declaratory relief regarding those additional damages and the wrongful breach that caused them.

Perhaps Pabst can be forgiven for thinking there would be no future profits from the distribution of its beer, because of the Colt 45 component.

So, to summarize, when considering an anti-SLAPP motion, always examine the “protected activity”. Mission was suing for breach of contract and declaratory relief, arising from Pabst’s termination of the contract. Even if Pabst was 100% confident that it had the unfettered right to terminate the contract (a position that turned out to be incorrect), this remained a contract claim and did not involve any protected activities within the meaning of the anti-SLAPP statute.

Aaron Morris, Attorney
Aaron Morris
Morris & Stone, LLP

Tustin Financial Plaza
17852 17th St., Suite 201
Tustin, CA 92780

(714) 954-0700

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