912 F.3d 533
9th Cir.2018Background
- Montana operates a state-controlled liquor distribution system through the Department of Revenue (DOR); agency franchise stores (privately owned) buy liquor from DOR and sell retail/wholesale.
- LL Liquor (Lolo Liquor) entered a ten-year agency franchise agreement (2013) specifying a commission rate (16.144%) and containing: (1) renewal/term language referencing statutory renewal at existing commission rates, (2) a clause allowing three-year review of commission rates per statute, and (3) Section 11 permitting the DOR to amend the agreement to conform to changes in law and providing that changes in Montana law take immediate effect.
- In 2015 the Montana Legislature passed SB 193 (effective phased in beginning Feb. 2016), replacing negotiated commission rates with a statutory schedule tied to prior-year purchases; most stores’ commissions rose but Lolo Liquor’s was reduced.
- Lolo Liquor sued state court alleging breach of contract and Contracts Clause violations (federal and state), sought damages and injunctive/declaratory relief; Montana removed to federal court.
- The district court denied a preliminary injunction and later granted summary judgment to Montana on the Contracts Clause claim; Lolo Liquor appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SB 193 "impairs" a contractual obligation under the Contracts Clause | Lolo: DOR promised commission rate would not be lowered during 10-year term; SB 193’s unilateral reduction impairs that contractual right | Montana: Section 11 and statutory language allow changes required by law; alternatively, sovereign retained right to modify franchise terms | Court: No Contracts Clause violation — change did not eliminate state-law remedy for breach; dispute is contractual interpretation/breach, not constitutional impairment |
Key Cases Cited
- Sveen v. Melin, 138 S. Ct. 1815 (explaining Contracts Clause threshold: substantial impairment analysis)
- Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (Contracts Clause framework)
- Gen. Motors Corp. v. Romein, 503 U.S. 181 (three-part Contracts Clause inquiry)
- Pure Wafer Inc. v. City of Prescott, 845 F.3d 943 (9th Cir.) (distinguishing ordinary breach from constitutional impairment; remedy availability critical)
- Univ. of Haw. Prof’l Assembly v. Cayetano, 183 F.3d 1096 (9th Cir.) (state law removing effective remedies can trigger Contracts Clause)
- Southern Cal. Gas Co. v. City of Santa Monica, 336 F.3d 885 (9th Cir.) (limitations on reading contracts as reserving unilateral governmental power)
- U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (state statutes may create enforceable contractual rights)
- Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400 (states may not avoid financial obligations by asserting sovereign power)
- United States v. Winstar Corp., 518 U.S. 839 (government contracts may allocate risk of later legal changes and permit damages recovery)