TRI COUNTY WHOLESALE DISTRIBUTORS, INC.; The Bellas Company, Plaintiffs-Appellants/Cross-Appellees, v. LABATT USA OPERATING CO., LLC; Cerveceria Costa Rica, S.A., North American Breweries Holdings, LLC, Defendants-Appellees/Cross-Appellants.
Nos. 15-3710/3769
United States Court of Appeals, Sixth Circuit.
Argued: March 17, 2016. Decided and Filed: July 6, 2016
828 F.3d 421
Before: BOGGS, SILER, and BATCHELDER, Circuit Judges.
OPINION
BOGGS, Circuit Judge.
After Prohibition ended in 1933 when the Twenty-First Amendment was rati-
One feature of Ohio‘s three-tier system is that when a supplier and a distributor enter into a franchise agreement, the agreement is protected from termination without just cause.
I
The plaintiffs in this case—Tri County Wholesale Distributors and Iron City Distributing (“the distributors“)—are distrib-
Labatt USA Operating is 100% owned and controlled by North American Breweries Holdings, LLC (“NAB Holdings“) through a series of five intermediate nested holding companies:
North American Breweries Holdings, LLC
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100% Ownership
North American Breweries Intermediate Holdings, LLC
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100% Ownership
North American Breweries, Inc.
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100% Ownership
NAB Holdco, LLC
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100% Ownership
North American Breweries Operating Holdco, LLC
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100% Ownership
Labatt USA Operating Holdings, LLC
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100% Ownership
Labatt USA Operating Co., LLC
Before December 11, 2012, the membership interests in NAB Holdings were owned by several investors (“KPS entities“). On December 11, the KPS entities sold their interests in NAB Holdings through a complex transaction that resulted in CCR American Breweries, Inc. (“CCR“) owning 100% of NAB Holdings. About three months later, on March 7, 2013, Tri County received a letter from CCR purporting to terminate Tri County‘s right to distribute the brands supplied by Labatt USA Operating. On March 11, 2013, Iron City received a similar letter. The letters claimed that CCR was entitled to terminate the franchise agreements because CCR‘s acquisition of NAB Holdings qualified under
The distributors responded by suing Cerveceria Costa Rica, S.A. (the owner of
The district court granted the suppliers judgment on the pleadings on the Takings Clause claim and summary judgment on the claim regarding the scope of
The distributors now appeal the district court‘s rulings, raising four issues: (1) whether the suppliers were entitled to terminate the franchises under
II
The first issue is whether the suppliers were entitled to terminate their franchise agreements with the distributors under
The distributors argue that the suppliers are not entitled to terminate the franchise agreements because the statute requires “a successor manufacturer” to acquire the stock or assets of “another manufacturer.” According to the distributors, when a supplier is owned by a parent company, which itself may be owned by several layers of parent companies, transfers of ownership at the upper levels do not trigger
The district court rejected the distributors’ argument because a strict reading of the word “manufacturer” as excluding parent companies would lead to a conclusion “that is illogical and could not have been the intent of the drafters,” quoting Esber Beverage Co. v. Labatt USA Operating Co., Nos. 2011CA00113, 2011CA00116, 2012 WL 983171, at *6 (Ohio Ct. App. Mar. 12, 2012), aff‘d, 138 Ohio St. 3d 71, 3 N.E.3d 1173 (2013). In that case, the Ohio Court of Appeals considered Labatt USA Operating‘s acquisition of the Labatt brands from InBev, and its subsequent attempt to terminate a franchise agreement that gave Esber the right to distribute the brands in ten Ohio counties. Id. at *1-2. Esber argued that “because Labatt USA Operating Co. was created for the purpose of supplying the Labatt brands and it was not supplying anything to anyone until it acquired the Labatt brands ... Labatt USA Operating Co. was not a ‘successor manufacturer’ at the time it acquired the Labatt brands.” Id. at *6. The court disagreed with Esber‘s reading of
While we acknowledge that a strict reading of the statutory language leads to the position argued by appellee [Esber], we find such a strict reading of the definition of “manufacturer” also leads to a conclusion that is illogical and could not have been the intent of the drafters. We do not find that the statutes intended to treat a business‘s right to terminate a franchise differently based on whether the business was created for the purpose of supplying a brand of alcohol to distributors or whether the business which acquired the brand was an existing supplier. In either situation, the entity [acquiring the brands] would be faced with making business decisions on how to operate most efficiently.
... [I]n the instant case, it is clear that there was a transfer of ownership and control of the Labatt brands from InBev to Labatt USA Operating Co., effective March 13, 2009. There is no evidence that InBev and Labatt USA Operating Co. are under common control. ... [T]he evidence is undisputed that there was in fact a complete sale of all assets related to the Labatt brands. The trial court therefore erred in finding that Labatt USA Operating was not a successor manufacturer within the meaning of
R.C. 1333.85(D) .
Id. at *6-7. Thus, even though Labatt USA Operating in that case did not sell any alcohol at the time it acquired the brands, it was a “successor manufacturer” because it received complete ownership and control of the brands from InBev.
Esber rejected a strict reading of “manufacturer” that is similar to the one proposed by the distributors in this case. Hence, the district court rejected the distributors’ argument:
[T]he Esber Court determined that the dispositive inquiry in determining whether an entity was a “manufacturer” within the meaning of “successor manufacturer” was whether it was in the business of manufacturing or supplying alcoholic products or brands, and thus would be faced with making business decisions regarding how to operate most efficiently in the sale of products or brands.
... [T]estimony confirms that in addition CCR‘s complete acquisition of Labatt USA Operating, it also is tasked with making ultimate business decisions concerning the operations of Labatt USA Operating. Thus, it is a “manufacturer” within the meaning of the term “successor manufacturer.”
We agree with the district court‘s application of Esber. Such a functional, control-based approach has been used consistently by courts in significant cases involving the applicability of
Schieffelin is not identical to this case, as Schieffelin did not involve a transfer of ownership at the parent-company level. Unlike CCR, Schieffelin & Co. itself “obtained a license from the State of Ohio to distribute the brands” that it acquired from S & S. Ibid. But Schieffelin did hold that the applicability of
Effectively, what has occurred is a restructuring of Carlsberg‘s business. It maintains control of its Brands, but those brands now have a different importer into the United States. Carlsberg continues to brew the beers, own the intellectual property, and approve the marketing campaigns. Additionally, it may terminate St. Killian under various circumstances and obtain a new importer. In essence, this is a restructuring of Carlsberg‘s importation arrangement, although its ownership and control of the Brands has never wavered.
Ibid. Because Carlsberg controlled the brands before and after the transaction, it was the sole “manufacturer.” Therefore, the transaction was not an acquisition by a “successor manufacturer” covered by
In the instant case, when Empson took over as il Molino‘s exclusive importer in February 2010, Empson did not acquire any ownership rights in il Molino. The record demonstrates that il Molino continues to maintain control over its brands and can terminate its relationship with Empson at any time.
il Molino‘s reasoning for the change was that it was effectively reorganizing its business structure. Because the wine remains under the ownership and control of il Molino, Empson does not qualify as a “successor manufacturer” under
R.C. 1333.85(D) .....
Following in the footsteps of these earlier cases, the district court in this case applied a control-based test. It concluded that because CCR exercised its newly acquired control over the business decisions of Labatt USA Operating after acquiring NAB Holdings from the KPS entities, it was a “successor manufacturer,” and could terminate the franchises under
The distributors’ counsel suggested at oral argument that this approach would undermine the statute‘s protectionist purposes and result in an “accelerated and immediate consolidation of the industry.” As an initial matter, we see no reason to read
Furthermore, even under the distributors’ interpretation of the statute, CCR could still have terminated the franchises if it had only structured the transaction differently. Instead of acquiring NAB Holdings, CCR could simply have set up a new entity, which would then take control of the brands directly from Labatt USA Operating. As we have already discussed, this sort of transaction would clearly trigger
III
The distributors argue in the alternative that, if the suppliers are allowed to terminate their franchises under
The distributors are the beneficiaries of an anticompetitive statute that deprives suppliers of their freedom to terminate contracts with distributors. Cf. Letter from C. Steven Baker, Director, Chicago Regional Office, Federal Trade Commission, to Illinois Senator Dan Cronin (Mar. 31, 1999) (“[A similar statute in Illinois] would shield the business of liquor distribution from market forces.... The likely result of such a static distribution system will be increased consumer prices.... We are unaware of any evidence establishing the need for this type of legislation.“). Under
The provision involved in this case,
While that is the essence of the distributors’ argument, they frame their case a little differently. The distributors claim that their franchises are property that has been taken for a solely private purpose in violation of the federal and Ohio constitutions. That argument fails because, even if we assume that their franchises are property, the Takings Clauses of the federal and Ohio constitutions deal with government takings of property. See Armstrong v. United States, 364 U.S. 40, 49, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960) (“The Fifth Amendment‘s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.“). In this case, the suppliers are private actors who were not exercising the power of eminent domain under a delegation of authority from the government. Cf. Nat‘l R.R. Passenger Corp. v. Two Parcels of Land, 822 F.2d 1261, 1265 (2d Cir. 1987) (discussing a statute that allowed Amtrak to exercise the “delegated power of eminent domain“).
The distributors try to tie the suppliers’ termination of the franchises to the government by arguing that the termination was sanctioned by the state under
IV
We now consider the proper method for calculating the diminished value of a distributor‘s business under
The parties identify three issues pertaining to the district court‘s calculation of the diminished value of the distributors’ businesses: (1) whether the court‘s calculation should have included the value of the distributors’ assets that were projected to be depleted during the time they attempted to acquire replacement brands to distribute; (2) whether the district court miscalculated the discount rate used to determine the value of the brands by averaging the capital structures put forth by the two parties’ experts; and (3) whether the district court should have subtracted from the award the profits that the distributors derived from continuing to distribute the brands after the date of valuation.
A
The distributors argue that the district court miscalculated the diminished value of their businesses because it failed to include the cash they were projected to lose in net operating losses while attempting to acquire replacement products. They claim to be entitled to those costs in addition to the fair market value of the lost brands. The district court declined to award these costs on the basis that they were already included in the court‘s calculation of the lost brands’ fair market value. The suppliers agree, arguing that the distributors are essentially asking for a double recovery on a portion of their lost profits.
The distributors present no persuasive rebuttal to the double-recovery argument. They first point to the testimony of witnesses asserting that the depletion of their assets is a separate and independent loss from the value of the lost brands. But witness testimony cannot resolve the legal question of what constitutes “the diminished value of the distributor‘s business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer.”
The distributors’ second argument is that:
[S]everal times throughout its decision, the District Court unambiguously stated that the DCF valuation which formed the basis for its diminished value award was not actually an award of Distributors’ projected profits on the NAB Brands. Rather the court used those projected profits as a tool to calculate the value of NAB Brands as a distinct, intangible asset.
The problem with this argument is that the only reason the distributors would be having net operating losses after losing the brands is that they are no longer able to earn profits from them. But when the district court awarded the distributors the value of the lost brands, they received a sum of money equal to the discounted
[T]he values of the terminated franchises are equal to an estimate of lost profits the Distributors would have reaped from such contracts for some reasonable time into the future. This number should, theoretically, fully compensate the Distributors for the diminished value of their businesses, and put them in the place they would have been, from a profit perspective, but for the termination of the contracts.... It is for this reason that this Court declines to add onto the value of the lost franchise contracts any depletion of assets.... Such theoretical losses are better viewed as lost profits, for which Distributors will be compensated fully through a DCF accounting of the Brands’ values.
The district court was correct to deny the distributors additional money equal to their projected net operating losses.
B
Both parties argue that the district court used the wrong capital structure in calculating the discount rate used to determine the diminished value of the distributors’ businesses—that is to say, the value of the lost brands. To calculate the value of the lost brands in this case, the experts of both parties used discounted-cash-flow analysis. That procedure measures the present-day value of an asset based on the income it is expected to generate in the future, discounted to present-day value. Discounting allows for the final valuation to take into account the time value of money (money today is worth more than money tomorrow) and the uncertainty that exists about whether the projected future cash flow will actually materialize.
The formula used by the district court to calculate the discount rate requires the input of a capital structure. The parties dispute whether the appropriate capital structure should be that of a typical buyer or that of the entire industry over the long term. The distributors ask us to use the capital structure of a typical buyer, which their expert Lamont Seckman testified was 35% equity and 65% debt. The suppliers ask us to use the long-term industry capital structure, which their expert Samuel Kursh testified was 93.2% equity and 6.8% debt. The district court below averaged the two experts’ figures in order to arrive at a capital structure of 64.1% equity and 35.9% debt.
Upon reviewing the parties’ briefs, we conclude that their arguments raise issues of fact, not law. This court reviews factual questions for clear error, and we must affirm the district court‘s decision unless it leaves us with a “definite and firm conviction that a mistake has been committed.” Max Trucking, 802 F.3d at 808.
The distributors raise two arguments for why the district court erred in relying in part on Dr. Kursh‘s long-term industry capital structure. First, they argue that Dr. Kursh “conceded that the usual valuation methodology does not consider the capital structure of the seller.” But that testimony from Dr. Kursh must be read in context. The distributors’ counsel asked Dr. Kursh whether it is typical to consider the seller‘s capital structure in determining the discount rate under “the classical definition of discount rate ... [which is] the rate necessary to attract ... the buyer.” Dr. Kursh acknowledged that, in de-
Second, the distributors argue that Dr. Kursh “conceded that there is actually no reported ‘industry average’ capital structure, and that he calculated his figures using many assumptions for which there is no evidence in the record, and applying a methodology that has never been published or peer-reviewed.” Dr. Kursh did acknowledge that his calculation of the long-term industry capital structure required him to “interpre[t] the data” and “make some assumptions.” But as the district court noted, “[n]either expert presented the Court with foundational data or evidence showing how they arrived at their respective capital structures,” and “both witnesses are qualified to produce estimations of the average capital structure used in the beer distribution industry.” The few excerpts from Dr. Kursh‘s testimony cited by the distributors are hardly sufficient for us to conclude that the court committed clear error when it relied on Dr. Kursh‘s long-term industry capital structure.
The suppliers argue in their cross-appeal that the district court erred equally in relying in part on the capital structure put forth by Seckman. Their primary criticism of Seckman‘s capital structure is that it focuses on the typical buyer‘s capital structure, when “the method of financing a purchase is irrelevant to the value of the asset being purchased.” The suppliers provide no citation to the record to support this assertion. Furthermore, the suppliers seem to contradict this argument in their reply brief:
Appellants incorrectly state that Dr. Kursh‘s long term industry capital structure was based on the seller‘s capital structure.... The district court chose to use ... the long term industry average [which was] based on NWBA data for all market participants—it was not limited to either buyers or sellers. Dr. Kursh‘s testimony, therefore, was the only reliable evidence on which the District Court could rely to calculate the WACC.
By arguing in their reply brief in favor of considering both buyers’ and sellers’ capital structures, the suppliers undercut their initial argument against considering the typical buyer‘s capital structures. To avoid this problem, the suppliers try to shift their argument in their reply brief by emphasizing that the district court contradicted itself when it relied on Seckman‘s buyer-focused capital structure while simultaneously finding that “the appropriate discount rate is one that uses the average industry capital structure.” We decline to consider this argument because the “general rule is that appellants cannot raise a new issue for the first time in their reply briefs.” Bendix Autolite Corp. v. Midwesco Enters., Inc., 820 F.2d 186 (6th Cir. 1987) (quoting Thompson v. C.I.R., 631 F.2d 642, 649 (9th Cir. 1980)).
The parties’ factual arguments essentially relitigate the “battle of the experts” that occurred at the trial court. After reviewing their arguments and the record, we are not left with a definite and firm conviction that a mistake has been committed. We affirm the district court‘s calculation of the discount rate.
The suppliers argue in their cross-appeal that the district court should have subtracted post-valuation-date profits from its calculation of the diminished value of the distributors’ businesses. While this litigation was pending in the district court, the suppliers were not allowed to transfer the brands in question to new distributors. Furthermore, after the court held the terminations valid and calculated the value of the brands, it granted the distributors’ motion for a stay pending appeal, which again prevented the transfer of the brands. The distributors have therefore been allowed to reap profits from the brands throughout the course of this litigation. The suppliers claim that these profits should be deducted from the court‘s calculation of the diminished value of the distributors’ businesses, because that calculation already includes projected future profits. They argue that allowing the distributors to keep the profits they earned would result in the distributors receiving a windfall.
As an initial matter, we address two arguments by the distributors that we find to be unpersuasive. First, the distributors argue that the suppliers’ position is at odds with their prior argument at the preliminary-injunction stage, during which they argued that a preliminary injunction was unnecessary because:
[T]he termination cannot effectively take place until [the suppliers] have compensated the Distributors for the diminished value of their businesses caused by the termination.... [A]bsent further order of this Court, the Distributors will be able to continue distributing Labatt Brands and Genesee Brands without interruption. In short, the Distributors face no harm that is either actual or imminent.
This passage does show that the suppliers previously said that the distributors could continue to distribute the brands while the litigation was pending. But that position is not inconsistent with the suppliers’ claim in this case. The suppliers were simply stating the distributors could continue to distribute the brands until the court ruled on whether the termination was valid, and if the distributors happened to win the case, they could keep the profits. The above-quoted passage says nothing about whether the distributors would get to keep the profits if they lost the case.
The distributors also argue that the suppliers forfeited their argument about post-valuation-date profits because they did not appeal the district court‘s ruling on their motion for an order allowing them to transfer the brands to a new distributor under
Having dispensed with these two arguments, we now turn to the district court‘s analysis. The district court gave several reasons for why it rejected the suppliers’ argument for deducting post-valuation-date profits. First, the court noted that nothing in the statute specifically calls for a deduction of post-valuation-date profits. But it is unsurprising that no such provision exists, because if a supplier successfully uses the statute to terminate a franchise agreement, the distributor would
The court‘s second reason for rejecting the suppliers’ argument was that “[a]lthough the DCF method [of calculating the franchises’ present-day value] is based conceptually on future cash flows, it is not, in actuality, merely a representation of future cash flows, but is, instead, an estimate of the total value of the intangible asset.” This position is at odds with the district court‘s earlier holding regarding the distributors’ net-operating-loss argument, which was premised on the fact that the experts’ calculations of the franchises’ present-day value already included projected future profits. If that is so, then awarding the distributors the present-day value of the franchises in addition to letting them keep post-valuation-date profits would give them a windfall. The distributors would be profiting from the brands for several years beyond the date on which the franchise agreements should have been terminated, and such profits are already included in the experts’ calculations of the “diminished value” of the distributors’ businesses.
To be more specific, the suppliers attempted to terminate the franchise agreements on March 7, 2013. As of the date of this decision, it has been over three years since the suppliers should have been able to terminate the agreements. The special masters’ calculations show that the first three years of projected profits after discounting make up $976,834 of the $2,757,459 awarded to Tri County and $106,891 of the $302,720 awarded to Iron City—roughly 35% of the total awards. If we did not account for the profits earned by the distributors during the pendency of this litigation, the distributors would receive a major windfall through this litigation that delayed the suppliers’ lawful exercise of their termination rights.
The court‘s third reason for rejecting the suppliers’ position was that the suppliers themselves made a profit from their transactions with the distributors. The court reasoned: “By Defendants’ argument, if Plaintiffs are to disgorge their profits, so should Defendants for the same period. What is more apparent is that both parties have benefitted financially from the status quo and such post-termination benefits should not enter into this Court‘s calculus.” However, the suppliers’ profits are not relevant to the inquiry prescribed by the statute,
The court‘s final reason for rejecting the suppliers’ argument for post-valuation-date profits was that it “sensed hypocrisy” in the suppliers’ argument, because:
On the one hand, they stand firmly by the principle that this Court must assess the value of the NAB Brands as of the date of termination. As such, this Court is prohibited from considering post-termination conditions or events. On the other hand, by their demand to deduct post-termination benefits, Defendants ask this Court to look to post-termination events. Further, rather than estimating post-termination profits based on the conditions of the businesses as of March 2013—which is the date from which Defendants determine diminished value—Defendants ask this Court to deduct actual profits from March 13 through January 2015. This inconsistency, too, goes against deducting post-termination benefits.
This analysis would be fair if the suppliers had actually terminated the franchise agreements on March 7, 2013, and been allowed to negotiate new agreements while this litigation was pending. But given that the distributors have been allowed to retain the brands for over three years beyond the termination date, letting them keep the profits derived from those brands while also awarding them a sum of money that includes projected profits for that time period would give them more than the “diminished value” of their businesses.
The district court raised an important point in criticizing the suppliers’ proposed deduction of actual profits rather than projected profits. The projected profits used in calculating the diminished value of the distributors’ businesses were discounted substantially in order to arrive at their value in 2013. Subtracting the actual profits earned by the distributors in 2014, 2015, and 2016 without discounting them would be unfair to the distributors. We agree with the district court that it would be improper to deduct actual profits. Therefore, we instead hold that the profits that the distributors were projected to earn during the period of time leading up to the final resolution of this litigation—that is to say, the date when the franchise agreements are actually terminated—must be deducted from their award.
V
We REVERSE the district court‘s calculation of the diminished value of the distributors’ businesses and REMAND with instructions to deduct the profits projected to be earned by the distributors during the period of time leading up to the date when the franchise agreements are finally terminated. We AFFIRM the remainder of the district court‘s decision.