Northern Bottling Co., Inc. v. PepsiCo, Inc. ( 2021 )

United States Court of Appeals
For the Eighth Circuit
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No. 20-1065
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Northern Bottling Co., Inc.
Plaintiff - Appellant
v.
Pepsico, Inc.
Defendant - Appellee
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Independent Bottlers Association; Pepsi-Cola Bottlers’ Association
Amici on Behalf of Appellant(s)
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Appeal from United States District Court
for the District of North Dakota - Bismarck
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Submitted: March 17, 2021
Filed: July 22, 2021
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Before COLLOTON, GRUENDER, and GRASZ, Circuit Judges.
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GRASZ, Circuit Judge.
Northern Bottling Co., Inc. (“Northern”) brought claims against Pepsico, Inc.
(“PepsiCo”), alleging that PepsiCo failed to protect Northern’s interests under their
exclusive bottling contracts. The district court 1 granted summary judgment to
PepsiCo, concluding that the contracts between the parties did not expressly require
PepsiCo to protect against certain shipments of PepsiCo’s products into Northern’s
territory. We affirm.
I. Background
PepsiCo sells carbonated beverages. For many years, PepsiCo has relied on
a network of local, independent bottlers tasked with purchasing syrup from PepsiCo,
manufacturing and bottling the carbonated beverages, and selling and distributing
the carbonated beverages to retail purchasers.
Each independent bottler executes a generic bottling contract with PepsiCo,
outlining the bottler’s territory and PepsiCo’s specifications for production. The
bottling contracts require the bottler to purchase syrup for the carbonated beverages
from PepsiCo and give the bottler exclusive rights to distribute PepsiCo products
within its assigned geographic territory.
Northern joined PepsiCo’s network of independent bottlers in 1955.
Northern’s original territory included several counties in North Dakota, but was later
expanded to include additional counties in both North and South Dakota. Northern
estimates that it services more than 2,000 customers.
Northern’s initial bottling contract was for Pepsi-Cola; however, over the
course of Northern’s more than sixty-five-year relationship with PepsiCo, Northern
has acquired bottling contracts for additional PepsiCo products. Each product is
governed by its own bottling contract, and the bottling contracts at issue on appeal
are Northern’s contracts pertaining to Pepsi-Cola, Diet Pepsi, Mountain Dew, and
Diet Mountain Dew. The bottling contracts contain choice-of-law provisions stating
that disputes arising from the contracts are governed by New York law.
1
The Honorable Daniel L. Hovland, United States District Judge for the
District of North Dakota.
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“Transshipping” in this context occurs when carbonated beverage products
from one bottler’s territory are transported and sold in another bottler’s exclusive
territory. Transshipment often occurs when, after the initial delivery of product from
a bottler to a retailer, the retailer re-sells the product to a separate distributor. That
distributor might then transport and sell the products in another bottler’s territory.
This problem often negatively impacts an independent bottler’s bargained-for rights
under its bottling contracts. PepsiCo has faced decades of litigation over its efforts
to battle transshipping. However, none of the bottling agreements mention
transshipment or include any language requiring PepsiCo to prevent transshipment
of competing products into Northern’s territory.
In 1980, Congress passed the Soft Drink Interbrand Competition Act, which
reinforced soft drink companies’ ability to control the manufacture, sale, and
distribution of their products. See 15 U.S.C. § 3501 et seq. In response to the Soft
Drink Act, PepsiCo developed the “PepsiCo Transshipment Enforcement Program”
(“TEP”), which created a process by which PepsiCo investigated and fined bottlers
whose product had been transshipped. Under the TEP, if a bottler suspects that
products have been transshipped into its territory, it can report the offense to
PepsiCo. PepsiCo then assigns an independent investigator to verify the presence of
transshipped products in the complainant’s territory. If a violation is discovered, the
TEP requires the offending bottler to pay a fine, which would then be credited to the
victim bottler, as well as the costs of the investigation. A customer that is the source
of transshipped product could face penalties ranging from a warning to suspension
or termination of its ability to purchase PepsiCo products.
Northern claims its problems with transshipping greatly increased in 2010
when PepsiCo purchased many of its independent bottlers and created the Pepsi
Bottling Company, a subsidiary of PepsiCo. After this vertical integration, PepsiCo
owned approximately 80% of its own bottling and sales capacity. This altered the
interests of the market participants, which Northern claims impacted PepsiCo’s
enforcement of the TEP.
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Northern alleges that since the formation of the Pepsi Bottling Company,
PepsiCo has been causing or allowing transshipment to take place without protecting
the interests of its independent bottlers. Northern also alleges the PepsiCo product
transshipped into its territory increased from fewer than 1,000 transshipped cases of
product between 2008 and 2010 to 6,500 cases in 2015. Northern admits that around
2015, it had pricing disputes with some of its customers. And, around that time, a
company named Core-Mark, who obtained Pepsi Bottling Company products from
brokers, began selling PepsiCo products to its own customers within Northern’s
territory. During the pricing dispute, four of Northern’s customers stopped
purchasing products from Northern and began purchasing products from Core-Mark.
Northern reported Core-Mark to PepsiCo on multiple occasions. In response,
PepsiCo investigated, determined the identity of the source bottlers, assessed and
collected fines from each such bottler, and then credited those payments to Northern.
PepsiCo also sent a cease-and-desist letter to Core-Mark regarding its unauthorized
sales in Northern’s territory. PepsiCo also tracked down the customers who were
the source of the product that eventually ended up in Core-Mark’s hands, and
PepsiCo sanctioned them.
Northern sued PepsiCo in 2015, alleging causes of action for breach of the
bottling contracts and tortious interference with the bottling contracts, among other
claims. PepsiCo moved for summary judgment. The district court granted
PepsiCo’s summary judgment motion. The district court reasoned that since the
express terms of the bottling contracts did not create a duty for PepsiCo to take any
steps to prevent transshipping, Northern’s claims failed as a matter of law. Northern
appeals.
II. Discussion
We review de novo a district court’s grant of summary judgment. Guardian
Fiberglass, Inc. v. Whit Davis Lumber Co., 509 F.3d 512, 515 (8th Cir. 2007).
Summary judgment is appropriate when there is no genuine issue as to any material
fact and the moving party is entitled to judgment as a matter of law. Id. “When
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reviewing a grant or denial of summary judgment, we consider the evidence in the
light most favorable to the nonmoving party and draw all reasonable inferences in
that party’s favor.” Id. (cleaned up) (quoting Mettler v. Whitledge, 165 F.3d 1197,
1200 (8th Cir. 1999)).
A. New York Common Law
We must first decide what law governs Northern’s breach of contract claim:
New York common law or New York’s Uniform Commercial Code (“UCC”).
“Federal district courts sitting in diversity . . . must apply the forum state’s
substantive law, including its conflict of law rules.” Guardian, 509 F.3d at 515.
North Dakota law “honor[s] choice-of-law provisions” in contracts, and it is
undisputed that the terms of the bottling contracts state that New York law governs
any conflict arising from the contracts. Chapman v. Hiland Partners GP Holdings,
LLC, 862 F.3d 1103, 1108 (8th Cir. 2017); accord Am. Hardware Mut. Ins. Co. v.
Dairyland Ins. Co., 304 N.W.2d 687, 689 n. 1 (N.D. 1981) (“Parties may stipulate
as to choice of law.”).
The analysis of whether PepsiCo owed a duty to prevent transshipping differs
depending on whether New York common law or the UCC applies. In short, if New
York common law applies to this dispute—as the district court believed—then
PepsiCo did not breach the bottling agreements. Alternatively, if we conclude that
the UCC applies to the bottling agreements, then Northern has a stronger argument
that PepsiCo had a contractual duty to prevent transshipping.
PepsiCo asserts that Northern has waived its argument regarding the
applicability of the UCC because Northern did not raise it before the district court.
We agree.
It is well settled that a party’s failure to raise an argument before a trial court
typically waives that argument on appeal. Heuton v. Ford Motor Co., 930 F.3d 1015,
1022 (8th Cir. 2019) (“Absent exceptional circumstances . . . we cannot consider
issues not raised in the district court.” (quoting Platte Valley Bank v. Tetra Fin. Grp.,
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LLC, 682 F.3d 1078, 1086 (8th Cir. 2012))). Here, Northern failed to argue for
application of the UCC before the district court. Not only that, but when PepsiCo
attacked the Tenth Circuit’s application of New York’s UCC in a case involving
nearly identical PepsiCo bottling agreements, Northern responded by arguing that
New York common law allowed the same result implicated by the UCC even in a
contract not governed by the UCC. Pepsi-Cola Bottling Co. of Pittsburg v. PepsiCo,
Inc., 431 F.3d 1241, 1256 n. 7 (10th Cir. 2005).
Northern argues against waiver by claiming that its citation to the Pepsi-Cola
Bottling Co. of Pittsburgh case throughout its response, and the district court’s
decision to address the Uniform Commercial Code versus common law issue in its
decision, shows that its UCC argument was squarely before the district court and
thus not waived. We find Northern’s argument unpersuasive. Happening to cite to
a case involving the same issue without developing an argument is not enough to
preserve an issue for appeal. 2
Northern was obligated to challenge the application of New York common
law in its response to PepsiCo’s motion for summary judgment. It cannot rely on
the district court’s analysis of the issue to preserve arguments it failed to raise. We
conclude that all of the arguments arising out of Northern’s suggested application of
the UCC also fail, and we uphold the district court’s application of New York
common law.
2
On appeal, Northern argues that the district court failed to properly analyze
this issue under the Erie doctrine. Because we conclude that Northern waived its
UCC arguments, we need not move forward with an Erie analysis.
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B. Breach of Contract
1. New York Common Law
Applying New York common law, it is evident PepsiCo did not owe a duty to
prevent transshipping under the express terms of the bottling contracts, and,
therefore, Northern’s breach claim fails as a matter of law.
It is undisputed that the plain terms of the bottling contracts do not create an
express duty for PepsiCo to prevent transshipping of products into Northern’s
territory. “New York follows the common law rule that, in interpreting a contract,
the intent of the parties governs, and therefore a contract should be construed so as
to give full meaning and effect to all of its provisions.” Novamedix, Ltd. v. NDM
Acquisition Corp., 166 F.3d 1177, 1181 (Fed. Cir. 1999) (cleaned up and quotation
omitted); accord W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y.
1990) (“[W]hen parties set down their agreement in a clear, complete document,
their writing should as a rule be enforced according to its terms. Evidence outside
the four corners of the document . . . is generally inadmissible to add to or vary the
writing.”).
“In interpreting a contract, ‘[w]ords and phrases are given their plain meaning.
Rather than rewrite an unambiguous agreement, a court should enforce the plain
meaning of that agreement.’” Novamedix, 166 F.3d at 1181 (quotation omitted).
“[W]hether contract provisions are ambiguous is a question of law . . . .” Ali v. Fed.
Ins. Co., 719 F.3d 83, 89 n. 9 (2d Cir. 2013). “[W]here ‘the intent of the parties can
be determined from the face of the agreement, interpretation is a matter of law,’ and
a claim turning on that interpretation may thus be determined by summary judgment
or by dismissal.” Novamedix, 166 F.3d at 1181 (quotation omitted). Thus, because
we apply New York common law and focus on the express terms of the bottling
agreements, we conclude PepsiCo had no duty to prevent transshipping of products
into Northern’s territory.
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2. Covenant of Good Faith and Fair Dealing
“[U]nder New York law, every contract contains an implied covenant of good
faith and fair dealing,” and the duty to exercise good faith and fair dealing can be
rooted in both New York common law and the UCC. Arbitron Inc. v. Tralyn Broad.,
Inc., 526 F. Supp. 2d 441, 447–48 (S.D.N.Y. 2007). “New York courts have
repeatedly affirmed that a party may be in breach of an implied duty of good faith
and fair dealing, even if it is not in breach of its express contractual obligations,
when it . . . deprive[s] the other party of the fruit of its bargain.” Duration Mun.
Fund, L.P. v. J.P. Morgan Sec. Inc., 2009 WL 2999201, at *6 (N.Y. Sup. Ct. Sept.
16, 2009) (unpublished). But, “[a] claim of implied duty of good faith and fair
dealing cannot create new duties under a contract or substitute for an insufficient
contract claim.” Duration, 2009 WL 2999201, at *7; accord Lehman Bros. Int’l
(Europe) v. AG Fin. Prod., Inc., 2013 WL 1092888, *2 (N.Y. Sup. Ct. Mar. 12,
2013) (unpublished) (“[T]he covenant of good faith and fair dealing cannot be
construed so broadly as to effectively nullify other express terms of the contract, or
to create independent contractual rights.” (citation omitted)).
A claim for the breach of the covenant of good faith and fair dealing is not “a
substitute for a nonviable breach of contract claim.” Triton Partners LLC v.
Prudential Sec. Inc., 752 N.Y.S.2d 870, 870 (N.Y. App. Div. 2003). “[T]he implied
covenant of good faith and fair dealing only precludes each party from engaging in
conduct that will deprive the other party of the benefits of their agreement.”
Arbitron, 526 F. Supp. 2d at 448 (alteration in original) (quotation omitted). The
covenant “merely brings to light implicit duties to act in good faith already
contained, although not [] specified in the contract. . . . [F]or the implied duty of
good faith and fair dealing to stand as a cause of action, there must be an underlying
contractual obligation between the parties.” Duration, 2009 WL 2999201, at *7.
Even if PepsiCo was bound to avoid conduct that would deprive Northern of
its benefits under the EBA with PepsiCo, Northern’s claim that PepsiCo breached
the implied duty of good faith and fair dealing cannot survive summary judgment.
There is no dispute of material fact with respect to PepsiCo’s conduct, and a
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reasonable factfinder could not find that PepsiCo engaged in conduct that deprived
Northern of its benefits under the EBA. PepsiCo implemented and enforced the TEP
even though it was not required to do so under the plain terms of the bottling
agreements. And, Northern does not dispute that PepsiCo followed up on Northern’s
complaints against Core-Mark or that PepsiCo reprimanded the offending bottlers
who were the source of products that went to Core-Mark. PepsiCo’s enforcement
of the TEP demonstrates that it acted in good faith to protect Northern’s territory
under the bottling agreements. However, those actions do not manifest or arise out
of an implied duty to prevent transshipping. We conclude that Northern cannot rely
on an implied duty to create obligations that are not expressly included in the bottling
contracts, and that duty cannot provide a basis for Northern’s breach of contract
claim.
3. Alleged Factual Disputes
Northern argues the district court erred in finding that there was no genuine
dispute of material fact on its breach of contract claim because the magistrate judge
assigned to this matter found that there were issues of fact. Without the parties’
consent, magistrate judges cannot issue binding decisions on dispositive motions.
See Roell v. Withrow, 538 U.S. 580, 585 (2003); see also United States v. Raddatz,
447 U.S. 667, 673 (1980). Furthermore, the discovery orders Northern clings to are
clearly interlocutory orders, not decisions on the merits. See Gander Mountain Co.
v. Cabela’s, Inc., 540 F.3d 827, 830 (8th Cir. 2008) (“[A] discovery ruling is
‘clearly’ an interlocutory decision.” (citing FirsTier Mortg. Co. v. Invs. Mortg. Ins.
Co., 498 U.S. 269, 276 (1991))). Thus, Northern’s argument that the magistrate
judge’s rulings create issues of fact fails.
Because the bottling agreement is unambiguous and fails to confer a
contractual duty on PepsiCo to prevent transshipping, and given Northern’s inability
to establish that PepsiCo owed a duty to prevent transshipment of products into
Northern’s territories, there is no genuine dispute of material fact and Northern’s
breach of contract claim was properly disposed of on summary judgment.
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C. Tortious Interference
Finally, Northern argues that the district court erred in granting summary
judgment on its tortious interference claim because (1) in the event that Northern’s
breach of contract claim fails, its tort claim survives, and (2) the issue of causation
was properly reserved for a jury.
Both parties agree that North Dakota law governs Northern’s tort claim.
[I]n order to prevail on a claim for unlawful interference with business,
a plaintiff must prove the following essential elements: (1) the
existence of a valid business relationship or expectancy; (2) knowledge
by the interferer of the relationship or expectancy; (3) an independently
tortious or otherwise unlawful act of interference by the interferer;
(4) proof that the interference caused the harm sustained; and (5) actual
damages to the party whose relationship or expectancy was disrupted.
Lochthowe v. C.F. Peterson Estate, 692 N.W.2d 120, 126 (N.D. 2005) (quoting
Trade ‘N Post, L.L.C. v. World Duty Free Americas, Inc., 628 N.W.2d 707, 717
(N.D. 2001)). “It is not enough for a plaintiff to show a mere possibility that he
would have obtained some economic benefit in the absence of a defendant’s
interference . . . . Rather, the plaintiff must show he would have obtained the
economic benefit in the absence of the interference.” Carlson v. Roetzel & Andress,
No. 3:07–cv–33, 2008 WL 873647, at *13 (D.N.D. Mar. 27, 2008) (unpublished)
(internal citations omitted).
Northern’s tort claim immediately fails because its tort allegations are rooted
in the contractual dispute between it and PepsiCo. Van Sickle v. Hallmark & Assocs.,
Inc., 744 N.W.2d 532, 540 (N.D. 2008) (“[I]f the defendant’s conduct . . . would
give rise to liability only because it breaches the parties’ agreement, the plaintiff’s
claim ordinarily sounds only in contract.”).
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Northern argues that its tort claim arises not from the contract, but from
PepsiCo’s failure to prevent transshipping. Northern contends its customers knew
that transshipped goods were widely available for purchase within Northern’s
territory, which allowed the customers to jump ship from Northern to Core-Mark
(for a while). We are unpersuaded. Not only does this argument fail to connect
PepsiCo to Northern’s alleged injury, but the undisputed facts show that PepsiCo
took reasonable steps to educate its customers against transshipment.
The undisputed record demonstrates that PepsiCo took reasonable measures
to enforce the TEP and to prevent transshipment of products into Northern’s
territory. Northern does not dispute PepsiCo’s representations that it investigated
each of Northern’s complaints against Core-Mark and that it followed the procedures
set forth in the TEP by tracking down the source of the transshipped products and
sanctioning the customers responsible for selling-off their purchased PepsiCo
products. We therefore agree with the district court that PepsiCo is entitled to
judgment as a matter of law on Northern’s breach of contract claim. Therefore, we
agree with the district court that no genuine dispute of material fact exists as to
Northern’s tort claim. Accordingly, we uphold the district court’s award of summary
judgment on Northern’s tortious interference claim.
III. Conclusion
The judgment of the district court is affirmed.
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