Pepsi-Cola Bottling Co. of Pittsburg, Inc. v. Pepsico, Inc.

FILED
United States Court of Appeals
Tenth Circuit
PUBLISH
December 20, 2005
UNITED STATES COURT OF APPEALS
Clerk of Court
TENTH CIRCUIT
PEPSI-COLA BOTTLING COMPANY OF
PITTSBURG, INC.,
Plaintiff-Appellant,
v. No. 03-3134
PEPSICO, INC.; BOTTLING GROUP, LLC,
Defendants-Appellees.
--------------------
A.D. HUESING BOTTLING WORKS, INC.;
HARCO DISTRIBUTORS, INC.;
INTERACTIONS, INC.; LAKESIDE
BOTTLING CO.; LIME ROCK SPRINGS CO.;
M.B.C. INC.; NEWBERRY BOTTLING
COMPANY, INC.; NORTH STAR
BEVERAGE COMPANY, INC.; NORTHERN
BOTTLING CO., INC.; PEPSI-COLA
BOTTLING CO. OF ALLIANCE, INC.;
PEPSI-COLA BOTTLING COMPANY OF
N.E. WISCONSIN, INC.; PEPSI-COLA
BOTTLING COMPANY OF NEW HAVEN,
MISSOURI, INC.; PEPSI-COLA BOTTLING
COMPANY OF BROOKFIELD, INC.; PEPSI-
COLA BOTTLING COMPANY OF
MARYSVILLE, INC.; PEPSI-COLA
MEMPHIS BOTTLING CO., INC.; PEPSI-
COLA OF THE HUDSON VALLEY;
REFRESHMENT SERVICES, INC.;
SOUTHEASTERN BOTTLING COMPANY
OF ARIZONA; STUEBER’S BEVERAGES,
INC.; THE GILLETTE GROUP, INC.;
CENTRAL INVESTMENT CORPORATION;
PEPSI-COLA BOTTLING COMPANY OF FT.
LAUDERDALE-PALM BEACH, INC.,
Amici Curiae.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. No. 01-CV-2009-KHV)
David W. Hauber, Baty, Holm & Numrich, P.C., Kansas City, Missouri, (Todd M.
Johnson, Baty, Holm & Numrich, P.C., Kansas City, Missouri; and William L. Kallal,
William L. Kallal, P.C., Cheyenne, Wyoming, with him on the briefs) for the plaintiff-
appellant.
Matthew J. Verschelden (David E. Everson, Jr., W. Dennis Cross, and Ann M. Scarlett,
with him on the brief), Stinson Morrison Hecker LLP, Kansas City, Missouri, for the
defendant-appellee PepsiCo, Inc.
Andrew H. Schapiro (Richard M. Steuer and Matthew D. Ingber with him on the brief),
Mayer, Brown, Rowe & Maw LLP, New York, New York, for the defendant-appellee
Bottling Group, LLC.
Scott M. Mendel (John W. Rotunno, Erik F. Dyhrkopp, and Kara A. Elgersma, with him
on the brief), Bell, Boyd & Lloyd LLC, Chicago, Illinois, for amici curiae A.D. Huesing
Bottling Works, Inc.; Harco Distributors, Inc.; Interactions, Inc.; Lakeside Bottling Co.;
Lime Rock Springs Co.; M.B.C. Inc.; Newberry Bottling Company, Inc.; North Star
Beverage Company, Inc.; Northern Bottling Co., Inc.; Pepsi-Cola Bottling Co. of
Alliance, Inc.; Pepsi-Cola Bottling Company of N.E. Wisconsin, Inc.; Pepsi-Cola Bottling
Company of New Haven, Missouri, Inc.; Pepsi-Cola Bottling Company of Brookfield,
Inc.; Pepsi-Cola Bottling Company of Marysville, Inc.; Pepsi-Cola Memphis Bottling
Co., Inc.; Pepsi-Cola of the Hudson Valley; Refreshment Services, Inc.; Southeastern
Bottling Company of Arizona; Stueber’s Beverages, Inc.; the Gillette Group, Inc.
G. Jack Donson, Jr., Marcia V. Andrew, Jeanne M. Bruns, Taft, Stettinius & Hollister
LLP, Cincinnati, Ohio; James B. Helmer, Jr., Frederick M. Morgan, Julie W. Popham,
2
Helmer, Martins & Morgan Co., L.P.A., Cincinnati, Ohio, on the brief for amici curiae
Central Investment Corporation and Pepsi-Cola Bottling Company of Ft. Lauderdale-
Palm Beach, Inc.
Before HENRY, BRISCOE, and HARTZ, Circuit Judges.
BRISCOE, Circuit Judge.
Plaintiff Pepsi-Cola Bottling Company of Pittsburg, Kansas (Pittsburg Pepsi)
appeals the district court’s order granting summary judgment in favor of defendants
PepsiCo, Inc. (PepsiCo) and its wholly owned subsidiary, Bottling Group, LLC (Bottling
Group). While Pittsburg Pepsi asserts claims sounding both in tort and in contract, its
overriding contention is that defendants have interfered with its contractual right to sell a
full line of Pepsi products in its exclusive territory. We affirm in part, reverse in part, and
remand.
I.
As this is a summary judgment case, we review the evidence in the light most
favorable to the non-moving party, which in this case is Pittsburg Pepsi. PepsiCo is a
leading seller of soft drink concentrate and it controls the trademarks associated with its
products. Under an Exclusive Bottling Appointment (EBA), PepsiCo enters into an
individual agreement with a bottler for the bottling and distribution of its soft drink
products within a designated geographic territory. Under a syrup appointment, PepsiCo
enters into an individual agreement with a bottler to manufacture, sell, and distribute
3
fountain syrup within designated geographic territories.
Pittsburg Pepsi is an independent bottler of PepsiCo products.1 In addition to
PepsiCo products, Pittsburg Pepsi distributes products manufactured by other concentrate
companies that do not compete with its PepsiCo products. Pittsburg Pepsi sells, on
average, 500,000 cases of beverage products each year. PepsiCo issued an EBA to
Pittsburg Pepsi on September 28, 1959, for Pepsi-Cola for the designated territory
encompassing the Kansas counties of Bourbon, Crawford, Cherokee, and part of Labette,
and part of the Missouri counties of Jasper and Barton. The EBA provided in relevant
part:
Pepsi-Cola Company . . ., herein called the Company, hereby
appoints:
Name Pepsi-Cola Bottling Company of Pittsburg, Inc.
Address Pittsburg, Kansas
herein called Bottler, as its exclusive bottler, to bottle and distribute the
carbonated beverage known as “Pepsi-Cola” in the following described
territory . . . and nowhere else. . . .
....
2. That the Bottler will not bottle, distribute or sell, directly or
indirectly, any other cola beverage or any other beverage with the name
Cola and/or any beverage which could be confused with Pepsi-Cola.
....
4. That the Company will sell to the Bottler, and the Bottler will
purchase, at the Company’s then price or prices . . . at the time of each sale,
the Bottler’s requirements of Pepsi-Cola concentrate or syrup for the
bottling of Pepsi-Cola hereunder, payment for same to be made by the
Bottler in advance of shipment; and all Pepsi-Cola concentrate or syrup so
1
Although Pittsburg Pepsi is considered a bottler, it no longer operates a bottling
plant. Instead, it purchases bottled Pepsi products from Wis-Pak, Inc., a Wisconsin
cooperative of 27 independent bottlers (including Pittsburg Pepsi). Wis-Pak buys
concentrate from PepsiCo, manufactures the products, and ships the products to members
of the cooperative.
4
purchased will be used by the Bottler for the bottling of Pepsi-Cola in the
Territory and for no other purpose.
....
7. That the Bottler will sell the bottled Pepsi-Cola in the Territory at
the Bottler’s price per case plus the deposit charge for bottles and case. The
Company may from time to time suggest to the Bottler the price per case to
be charged by him and the deposit charge.
8. That the Bottler will push vigorously the sale of bottled Pepsi-
Cola throughout the entire territory in the 12-oz. size bottle and in any other
size bottle prescribed by the Company for the Territory. Without in any way
limiting the Bottler’s obligation under this Paragraph 8, the Bottler must
fully meet and increase the demand for Pepsi-Cola throughout the Territory
and secure full distribution up to the maximum sales potential therein
through all distribution channels or outlets available to soft drinks, using
any and all equipment reasonably necessary to secure such distribution;
must service all accounts with frequency adequate to keep them at all times
fully supplied with Pepsi-Cola; must use his own salesmen and trucks . . . in
quantity adequate for all seasons; and must fully cooperate in and
vigorously push the Company’s cooperative advertising and sales
promotion programs and campaigns for the Territory. In addition the
Bottler will actively advertise, in all reasonable media including adequate
point-of-purchase advertising, and vigorously engage in sales promotion of,
bottled Pepsi-Cola throughout the Territory at his own cost and expense. . . .
....
19. That this Appointment expresses fully the understanding, and
that all prior understandings are hereby cancelled, and no future changes in
the terms of this Appointment shall be valid, except when and if reduced to
writing and signed by both the Bottler and the Company, by legally
authorized officials.
20. The failure by the Company to enforce at any time or for any
period of time any one or more of the terms or conditions of this
Appointment, shall not be a waiver of such terms or conditions or of the
Company’s right thereafter to enforce each and every term and condition of
this Appointment.
21. That this Appointment and all its terms and conditions shall be
governed by and interpreted under the laws of the State of New York.
App. II at 586-89. After issuing Pittsburg Pepsi the Pepsi-Cola EBA, PepsiCo offered
and Pittsburg Pepsi accepted EBAs for the following products: Teem (1960); Diet
5
Pepsi/Diet Pepsi-Cola (1964); Mountain Dew (1965); Sugar Free Teem (1965); Pepsi
Light.Pepsi-Cola Light (1976); Diet Pepsi Free/Diet Pepsi-Cola Free (1982); Slice and
Diet Slice (1985); Mug/Mug Old Fashioned Root Beer and Diet Mug/Diet Mug Old
Fashioned Root Beer (1998); and Pepsi One (1998).2 In each successive EBA, Pittsburg
Pepsi agreed not to sell another beverage in the same flavor category as the beverage
specified in the EBA. In most instances, Pittsburg Pepsi has also received a syrup
appointment for the same product.
PepsiCo’s move toward alignment
PepsiCo has historically viewed the EBA, and specifically its grants of exclusive
territories to its independent bottlers, as the core of its overall business structure. In his
August 14, 1975, testimony before the Federal Trade Commission, then-PepsiCo
President Walter S. Mack discussed how PepsiCo used the promise of exclusivity to
persuade independent businessmen to become PepsiCo bottlers:
[W]e had to give them confidence in the early days that we were going to
win our trademark suits and that they were taking on a beverage which they
would have the exclusive right to from then on for the rest of their lives. . . .
[We told the bottlers] that the parent company would protect their franchise,
the terms and conditions of the franchise, and do everything we could to
protect both the trademark and the name and their territory for them on an
exclusive basis.
App. III at 1019-21. Mack testified that PepsiCo told the bottlers they would have an
exclusive franchise for the rest of their lives or in perpetuity. On March 19, 1980,
2
Although not identical, the subsequent EBAs include substantively the same
provisions as the original Pepsi-Cola EBA.
6
PepsiCo’s then vice president for corporate affairs, Cartha D. Deloach, testified before the
House Subcommittee on Monopolies and Commercial Law on the Soft Drink Interbrand
Competition Act of 1980 (Act), 15 U.S.C. § 3501, et. seq. Deloach claimed PepsiCo
needed the Act’s passage to protect its right to issue bottlers EBAs and syrup
appointments covering exclusive territories. Deloach testified:
If Exclusive Territories are eliminated, dozens and dozens of Pepsi-
Cola bottlers will be driven out of business by their larger neighbors. This
will be accomplished quickly through the ability of larger bottlers by virtue
of their location in major areas and their bottling capacity to take the cream
of the business . . . leaving smaller bottlers with less profitable accounts to
service . . . . Long term, not only will there be fewer outlets handling soft
drinks, but after the bottler ranks are decimated, the survivors, I am certain,
will be able to raise soft drink prices higher than ever. . . .
We totally support our bottlers in their efforts to preserve the
Exclusive Territories we granted them because we are deeply grateful for
their past and continuing commitment to their parent company and because
we need such fiercely competitive partners in our future.
App. III at 1030-33.
PepsiCo subsequently acted in 1984 to protect the exclusive territories of its
independent bottlers by instituting a vigorous no-fault transshipment enforcement
program (TEP). Transshipment occurs when a product from one bottler is offered for sale
in a territory for which another bottler has an EBA. Under the TEP, which remains in
place today, if any bottler discovers Pepsi products manufactured by another bottler in its
territory, the bottler can file a complaint with PepsiCo’s Transshipment Department. If
PepsiCo confirms that products came from another bottler, it can impose a charge for
each case of transshipped beverage, to be paid to the bottler whose territory is violated
7
with the amount to be determined by PepsiCo. The TEP restrictions apply to all bottlers.
During the 1980s and 1990s, two significant changes occurred which directly
affected PepsiCo’s ability to successfully compete nationwide, and ultimately its
relationship with its bottlers. First, significant consolidation occurred on the retail side of
the soft drink industry as a result of the growth of large, nationwide retail chains like
Wal-Mart and Sam’s Club. PepsiCo’s biggest customers had stores in multiple bottling
territories and began demanding that PepsiCo service their needs at a national rather than
a local level. Second, in the 1980’s, PepsiCo’s chief rival, the Coca-Cola Company
(Coke) established a single anchor bottler, Coca-Cola Enterprises, and began acquiring its
individual bottlers. This consolidation enabled Coke to benefit from the economy of
scale and to negotiate more effectively with large retail chains.
PepsiCo initially tried to replicate Coke’s success without eliminating its
independent bottler network. As part of a strategy termed “alignment,” PepsiCo
developed a pair of contracts in the early 1990s: the customer development agreement
(CDA) and the marketplace investment agreement (MIA). Operating together, these
contracts enabled PepsiCo to use its independent bottlers to obtain nationwide market
power. PepsiCo still uses both contracts today. The CDA is an agreement between
PepsiCo and large retail chains. Under the CDA, PepsiCo agrees to provide financial
incentives to the chain in exchange for a promise that the chain will pursue various
marketing activities to increase sales of Pepsi products. In exchange, the chain receives a
rebate for each case of Pepsi products purchased from its local bottler. PepsiCo and its
8
bottlers typically share the cost of these rebates pursuant to the MIA. Under the MIA,
PepsiCo agrees to pay its independent bottlers to help offset marketing costs. In return,
the independent bottlers agree to pay PepsiCo for their portion of the rebate costs as well
as costs affiliated with national advertising campaigns. A bottler’s ability to receive
marketing funds from PepsiCo is thus conditioned on the bottler’s willingness to
participate in the retail-rebate system.
Although most bottlers sign the MIA and agree to pay their share of the costs
under the CDAs, Pittsburg Pepsi has refused to sign the MIA.3 By refusing to sign the
MIA, Pittsburg Pepsi has avoided any contractual obligation to share the cost of the CDA
rebates with PepsiCo. In return, PepsiCo has not provided Pittsburg Pepsi with the
marketing funds that other independent bottlers receive when they sign the MIA.
Nonetheless, to stay competitive with Coke, PepsiCo has fully paid the cost for CDAs and
national advertising campaigns in Pittsburg Pepsi’s territory.
In the late 1990s, PepsiCo began contemplating more aggressive steps to
consolidate/align its bottler network. In November 1996, Pepsi’s national executive team
(NET) determined that, as part of its three-year strategic plan, it should focus on “system
alignment” in order to “capture [a] competitive advantage from direct bottling system
control while achieving cost parity with Coke.” App. IV at 1278. The NET believed the
3
Pittsburg Pepsi believes that because the CDA permits PepsiCo to determine the
discount that national chains receive (and thus indirectly affects the price those chains
ultimately pay for Pepsi products), the CDAs take away Pittsburg Pepsi’s right under the
EBA to price its product in its exclusive territory.
9
key barrier to achieving perfect alignment was the fact that “55 % of the bottling system[]
has one unified decision point,” in the form of one large-scale bottler controlled by
PepsiCo and “45 % of the bottling system[] has 125 independent decision points” in the
form of 125 individual bottlers. Id. at 1281. Thus, at a March 1997 meeting, PepsiCo
considered aggressively buying back franchises and other tactical actions in order to
“[a]ccelerate U.S. alignment through the creation of 4-6 anchor bottlers within the next 12
months.” App. IV at 1716. Thereafter, PepsiCo began focusing on a specific strategy
with respect to those independent bottlers who were not willing to participate in
PepsiCo’s business model. It is Pittsburg Pepsi’s contention that the underlying goal of
this business strategy was to eliminate those independent bottlers who did not participate
in PepsiCo’s business model. Id. at 1693. During this period, each bottler’s “strategic
importance” and “degree of alignment” were assessed. Bottlers viewed as being of low
strategic importance and generally “unaligned” were to be invested in “only to prevent
dysfunction” and were to receive “[m]inimum resourcing” and “[n]o system advantages.”
Id. at 1301.
At a March 1998 PepsiCo board of directors meeting, Indra K. Nooyi, PepsiCo’s
then senior vice president of corporate strategy and development, presented a competitive
analysis of the Coca-Cola Company, focusing on Coke’s acquisition of bottlers. Nooyi
noted that in cases where an independent bottler failed to comply with Coke’s demands,
the bottler was “often met with [a] punitive response,” including termination of its EBA.
App. V at 1894. Nooyi further noted that in many markets where PepsiCo had as many
10
as five separate bottlers, Coke was servicing the same area with its single anchor bottler.
In early 1999, PepsiCo launched its bottler consolidation plan by implementing a
few national “anchor bottlers” which reported directly to PepsiCo. Currently, PepsiCo
has three anchor bottlers which account for 70-72 percent of Pepsi product volume in the
United States. The largest of those anchor bottlers is defendant Bottling Group. Bottling
Group existed as part of PepsiCo during the 1990s and was comprised of PepsiCo-owned
bottling operations PepsiCo had acquired from independent bottlers who wanted to sell
their franchises. In March 1999, PepsiCo entered into a master bottling agreement
(MBA) with Bottling Group, granting Bottling Group the exclusive right to manufacture,
sell, and distribute Pepsi products in all or a portion of 41 states, including areas to the
west, south, and east of Pittsburg Pepsi’s territory.
After implementing the anchor bottler network, PepsiCo turned its attention to
acquiring or aligning its independent bottlers. According to Richard Lawrence, who
serves as PepsiCo’s vice president of franchise development and oversees its
transshipment department, “[a]fter the anchor bottlers were created in 1999, it was
expected that the anchor bottlers (rather than PepsiCo) would pursue future bottler
acquisitions.” App. XII at 4761. From 1999 until 2003, Bottling Group employed
Lawrence to negotiate bottler acquisitions on its behalf and to help develop a bottler
acquisition plan.
Concurrent with Bottling Group’s plan to acquire independent bottlers, PepsiCo
developed a plan to weaken some of its independent bottlers. On November 13, 2000,
11
PepsiCo’s senior executive team met at PepsiCo’s headquarters to ratify “[o]ur Approach
with Unaligned Bottlers,” an internal strategy that outlined six criteria PepsiCo used to
determine whether a bottler was deemed in “non-compliance” with PepsiCo’s objectives
and should be classified as “unaligned.”4 App. III at 1139. Fourteen bottlers, including
Pittsburg Pepsi, were classified as “unaligned.” PepsiCo proposed a particular “solution”
for each unaligned bottler, which Pittsburg Pepsi contends had as its goal to force each
bottler into the position of being a “potential acquisition candidate.” Id. at 1140-43. The
“solution” set forth for Pittsburg Pepsi was: “Withhold A&M to offset customer CDA
commitments” and “not offered Mist or Dole appointments.” Id. at 1143. PepsiCo
decided to stop offering EBAs for new Pepsi products to most unaligned bottlers. As a
result, Pittsburg Pepsi was not offered EBAs for Sierra Mist, Diet Sierra Mist,
FruitWorks, Dole, Mountain Dew Code Red, Pepsi Twist, or Diet Pepsi Twist.
Transshipment by third-party vendors
Bottling Group is the largest transshipper in the PepsiCo system, paying
$4,397,073 in transshipment fines and expenses in 1999, and $2,955,517 in 2000.
Pittsburg Pepsi through counsel has repeatedly complained to PepsiCo about Bottling
Group’s transshipment, sending Bottling Group letters on February 4, 1992, May 30,
4
The six criteria used for determining lack of alignment were: (1) failure to
participate in national or regional CDAs; (2) failure to sign the fountain agreement and
failure to allow open commissary deliveries in its territories; (3) refusal to sign and
support the MIA; (4) failure to report monthly sales; (5) failure to compete vigorously in
its marketplace; and (6) poor product quality and customer service. Pittsburg Pepsi
concedes it met the first four criteria, but disputes PepsiCo’s conclusion that it has failed
to compete vigorously in the marketplace.
12
1995, October 5, 1995, and on May 17, 1996. As a part of the present litigation, Pittsburg
Pepsi’s transshipment claim against Bottling Group pertains to three vendors.
First, Pittsburg Pepsi relies on Bottling Group’s contacts with Grace Energy
Corporation (Grace) to support its transshipment claims. Grace operates 39 convenience
stores, three of which are in Pittsburg Pepsi’s territory. According to Mike McDaniel, the
director of Grace’s convenience store division, Grace purchased fountain syrups from
both Pittsburg Pepsi and Bottling Group for 18 years. At some point, McDaniel told
Terry Sergeant, who worked for Bottling Group, that it was important that Grace deal
with one company (i.e. bottler) for all of its needs. Sergeant assured McDaniel that
Bottling Group could serve that purpose. According to McDaniel, Sergeant gave him the
impression that Sergeant had the authority to speak on behalf of Pittsburg Pepsi.
Thereafter, Grace began selling fountain syrups provided by Bottling Group in Pittsburg
Pepsi’s territory. Similarly, Wayne Gruenwald, Grace’s director of corporate
merchandising, stated that Sergeant, and Byron Brooks, Bottling Group’s Missouri plant
manager, told him that Bottling Group hoped to own Pittsburg Pepsi one day. According
to Gruenwald, during syrup fountain negotiations, Bottling Group represented that it
could cover all of Grace’s needs, including those parts of Grace’s business serviced by
Pittsburg Pepsi. Gruenwald further stated that John Mehalic, Bottling Group’s location
unit manager in Missouri, knew that Grace was purchasing Pepsi products from a Sam’s
Club in Bottling Group’s territory and transporting it into Pittsburg Pepsi’s territory, but
took no action to stop Grace.
13
The second major third-party vendor that has transshipped Pepsi products into
Pittsburg Pepsi’s territory is Southeast Kansas Vending (SEK). SEK is a full-service
vending company in Girard, Kansas, which stocks soft drink vending machines in
Pittsburg Pepsi’s territory with Pepsi, Coke, and Cadbury product.
From July 1, 1997 through the spring of 2002, SEK got 90 percent of its
Pepsi product from Sam’s Club in Joplin, Missouri, which buys from
Bottling Group. From July 1997 through December 2001, SEK purchased
12,810 cases of Pepsi product from Sam’s Club and 4,136 cases of Pepsi
product from Food 4 Less (also Joplin), for resale in [Pittsburg Pepsi]’s
territory.
App. XIX at 7684. Historically, PepsiCo has discussed with Sam’s Club the issue of
transshipment. As early as 1990, it appears the major soft-drink distributors were actively
engaged in policing and limiting transshipment by third-party vendors seeking to
purchase their products from Sam’s Club.
According to Lawrence, if somebody is buying 500 cases per month from
Sam’s Club, ‘that’s not going into the garage,’ and that if a bottler knows
that Sam’s Club is selling that amount of product and it is ending up in
another territory, the bottler would typically try to work something out to be
sure that the product was not getting out of its territory. Also, . . . if a
bottler has a third party vendor with outlets both inside and outside the
bottler’s territory, the bottler should make sure that the vendor did not sell
the bottler’s products into another bottler’s territory.
Id.Pittsburg Pepsi first complained about SEK’s transshipment of Bottling Group’s
products in a November 22, 1999, letter to Bottling Group. On December 3, 1999,
Bottling Group replied that “we have no knowledge or information as to whom [SEK]
may be doing business with to obtain Pepsi-Cola products.” App. XV at 6037. Pittsburg
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Pepsi hired a private investigator who determined that SEK was purchasing products from
the Sam’s Club in Joplin, but apparently did not provide this information to Bottling
Group. On January 17, 2000, Pittsburg Pepsi again complained to Bottling Group that
SEK was transshipping Pepsi products into its territory. In response, Bottling Group
“suggested that if Pittsburg Pepsi told Bottling Group the source of SEK product, it might
be able to investigate the matter.” App. XIX at 7684. Some time thereafter, “because of
its transshipment policy or litigation involving Bottling Group and Pittsburg Pepsi, Sam’s
Club notified SEK that it could not purchase Pepsi product for resale in [Pittsburg
Pepsi’s] territory.” Id. SEK has stopped purchasing Pepsi products from Sam’s Club for
resale.
The third major third-party vendor that has transshipped Pepsi products into
Pittsburg Pepsi’s territory is Smith Foods Vending (Smith). Smith is a Kansas
corporation, headquartered in Joplin, Missouri, that offers vending and cafeteria services
in Missouri, Oklahoma, and Kansas. Approximately 15 percent of its accounts are
located in Pittsburg Pepsi’s territory; the rest are in Bottling Group’s territory. For
several years, Smith purchased Pepsi products from both Bottling Group and Pittsburg
Pepsi. In October 2000, Smith stopped purchasing Pepsi products from Pittsburg Pepsi
because Smith believed Pittsburg Pepsi’s prices were too high, and because Smith
believed that Pittsburg Pepsi sold the same Pepsi products to Smith’s competitors at a
reduced price. Without informing Bottling Group, in October 2000, Smith began
stocking its vending machines in Pittsburg Pepsi’s territory with Pepsi products purchased
15
from Bottling Group. Although Smith understood it was transshipping, in its view, it was
just trying to obtain Pepsi products at a fair price.
In the fall of 1999, Smith vice president Patricia Eggerman first spoke about
transshipment with Laurie Lloyd, a Bottling Group sales representative. Sometime
thereafter, Lloyd told Eggerman that if Smith was getting Pepsi products from Bottling
Group and reselling them in Pittsburg Pepsi’s territory, “it should stop.” App. XIX at
7685. Since that conversation, Bottling Group has monitored Smith purchases and they
have declined. C.L. Farabi, president of Pittsburg Pepsi, says he has continued to
complain to Bottling Group about Smith’s transshipment.
Procedural history
Pittsburg Pepsi filed this action against PepsiCo and Bottling Group in the United
States District Court for the District of Kansas.5 In its initial complaint, Pittsburg Pepsi
alleged violations of its EBA for regular Pepsi-Cola. Bottling Group moved to dismiss
Pittsburg Pepsi’s claims. The district court denied the motion. Pepsi-Cola Bottling Co.
of Pittsburg, Inc. v. PepsiCo, Inc., 175 F. Supp.2d 1288 (D. Kan. 2001).
Pittsburg Pepsi then filed a six-count second amended complaint, alleging: (1)
PepsiCo breached the EBAs and the implied covenant of good faith and fair dealing
because PepsiCo refused to extend new product appointments to Pittsburg Pepsi, and
5
Pittsburg Pepsi originally filed suit against Pepsi and Beverage Products
Corporation, a predecessor-in-interest to Bottling Group. Pittsburg Pepsi filed an
amended complaint that substituted Bottling Group as the defendant and successor-in-
interest to Beverage Products Corporation.
16
denied Pittsburg Pepsi funding and territorial protection from transshipment; (2) PepsiCo
assumed and breached various fiduciary duties to protect Pittsburg Pepsi’s territory; (3)
Pittsburg Pepsi was a third-party beneficiary of PepsiCo’s MIA with Bottling Group and
Bottling Group’s transshipment of PepsiCo products into Pittsburg Pepsi’s territory
violated Pittsburg Pepsi’s third-party beneficiary rights; (4) Bottling Group tortiously
interfered with Pittsburg Pepsi’s contractual agreement with PepsiCo and both defendants
tortiously interfered with Pittsburg Pepsi’s relationships with its customers; (5) PepsiCo
and Bottling Group engaged in a civil conspiracy and aided and abetted in a tort by
attempting to drive Pittsburg Pepsi and other independent bottlers out of business; and (6)
PepsiCo and Bottling Group violated the Kansas Restraint of Trade Act. All three parties
filed motions for summary judgment on all claims.
The district court granted the defendants’ motions for summary judgment as to all
claims. Pittsburg Pepsi filed a Rule 59(e) motion to alter or amend the judgment, which
the district court denied.6
II.
Standard of review
We review de novo a district court’s grant of summary judgment, applying the
same standard used by the district court. Simms v. Okla. ex rel. Dep’t of Mental Health
& Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir. 1999). Summary judgment is
6
Plaintiff has abandoned its claim under the Kansas Restraint of Trade Act, as well
as its claim that defendants aided and abetted in the commission of a tort.
17
appropriate “if the pleadings . . . show that there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ.
P. 56(c). The court views the record and draws all favorable inferences in the light most
favorable to the non-moving party. McKnight v. Kimberly Clark Corp., 149 F.3d 1125,
1128 (10th Cir. 1998).
Choice of law
This is a diversity action filed pursuant to 28 U.S.C. § 1332. In a diversity action,
we apply the substantive law of the forum state, including its choice of law rules. See
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 495-97 (1941); New York Life Ins.
Co. v. K N Energy, Inc., 80 F.3d 405, 409 (10th Cir. 1996). In this case, Kansas is the
forum state. As to the contract-based claims, Kansas choice of law rules honor an
effective choice of law by contracting parties. Brenner v. Oppenheimer & Co., 44 P.3d
364, 374 (Kan. 2002). As Pittsburg Pepsi’s contract claims are premised on the EBAs,
which state that the terms and conditions of the EBAs shall be governed and interpreted
by New York law, New York law applies to Pittsburg Pepsi’s breach of contract and
third-party beneficiary claims. As to the claims sounding in tort (tortious interference,
breach of fiduciary duty, and civil conspiracy), the parties agree the alleged injuries
occurred in Kansas and that Kansas law applies to those claims. See Ling v. Jan's
Liquors, 703 P.2d 731, 735 (Kan. 1985) (stating under Kansas choice of law rules, the
applicable law for tort claims is the law of the state where the aggrieved party suffered
injury).
18
Breach of contract by PepsiCo
Pittsburg Pepsi contends PepsiCo: (1) breached an express and implied-in-fact
contract by failing to offer Pittsburg Pepsi new product appointments; (2) breached an
express and implied-in-fact contract by failing to enforce the TEP against Bottling Group;
and (3) breached the implied covenant of good faith and fair dealing. The district court
concluded that PepsiCo was entitled to summary judgment because the EBAs did not
obligate PepsiCo to offer Pittsburg Pepsi new products or to enforce the TEP. Further,
finding no breach of the EBAs’ express terms, the court granted PepsiCo summary
judgment on Pittsburg Pepsi’s corresponding claim that PepsiCo breached the implied
covenant of good faith and fair dealing.7
7
Before proceeding to the merits, we must first determine whether the Uniform
Commercial Code (UCC) governs our interpretation of the EBAs. The parties did not
raise this issue in district court. As a result, the district court appears to have assumed,
without deciding, that the UCC applies. On appeal, PepsiCo now argues the UCC does
not apply to the EBAs.
Under New York law, the UCC governs contracts for sales, but not services. A
contract is one for “‘service’ rather than ‘sales’ when ‘service predominates,’ and the sale
of items is ‘incidental.’” Old Country Toyota Corp. v. Toyota Motor Distrib., Inc., 966 F.
Supp. 167, 168 (E.D.N.Y. 1997) (quoting Triangle Underwriters, Inc. v. Honeywell Inc.,
604 F.2d 737, 742 (2d Cir. 1979)). Conversely, a contract “must be considered one for
sales when services are merely incidental or collateral to the sale of goods.” Id.Applying these principles, New York courts have uniformly “ruled that [the UCC] applies
to a dealership agreement.” Id. Similarly, an overwhelming majority of other
jurisdictions have held that distributorship contracts are sales contracts and thus governed
by the UCC. See, e.g., Watkins & Son Pet Supplies v. The IAMS Co., 254 F.3d 607, 612
(6th Cir. 2001)(“The majority rule is that distributorship contracts are sales contracts.”);
American Suzuki Motor Corp. v. Bill Kummer, Inc., 65 F.3d 1381, 1386 (7th Cir.
1995)(same).
In this case the EBA’s purpose was to provide for and regulate PepsiCo’s sale of
products to Pittsburg Pepsi and Pittsburg Pepsi’s resale of those items. While there are
aspects of this agreement that make it a contract for services, in light of New York law
19
Failure to offer EBAs for new products
Pittsburg Pepsi contends that as a result of PepsiCo’s past practice of offering
Pittsburg Pepsi EBAs for new products, Pittsburg Pepsi has a contractual right to be
offered EBAs for new Pepsi products.8 Pittsburg Pepsi argues that the parties’ 39-year
course of dealing modified the original Pepsi-Cola EBA to include a provision entitling
Pittsburg Pepsi to be offered appointments for new Pepsi products. Relevant to this
claim, New York law places two limitations on the use of course of performance to
establish contract modification. N.Y. U.C.C. 2-208(3) (stating “course of performance
shall be relevant to show . . . modification,” “[s]ubject to the [UCC’s] provisions” on
modification). First, if the original contract is “[a] signed agreement which excludes
modification or rescission except by a signed writing,” New York law prohibits
modifying or rescinding that contract without a signed writing that conforms to the statute
of frauds. N.Y. U.C.C. § 2-209(2), (3). Second, New York law prohibits course of
performance evidence unless “the contract for sale involves repeated occasions for
performance by either party with knowledge of the nature of the performance and
opportunity for objection to it by the other.” Id., § 2-208(1) (2003).
relating to distributorships, we cannot conclude those aspects of the contract predominate
the sales aspects. We therefore apply the UCC to analyze the contract claims at bar.
8
Notably, following the district court’s opinion, PepsiCo offered (and Pittsburg
Pepsi accepted) appointments for the new Pepsi products which underlie this claim. See
Aplt Br. at 18 n.5; see also App. XX 8112-23. We conclude this fact does not moot
Pittsburg Pepsi’s claim because Pittsburg Pepsi may still recover damages for any injury
it sustained in the 21-month period it was not offered the EBAs for new products.
20
Applying New York law to the parties’ contract and subsequent actions, we are
unable to modify the original EBA based on the parties’ course of performance to now
require that PepsiCo offer Pittsburg Pepsi appointments for new Pepsi products. The
original Pepsi-Cola EBA requires that any modification of the agreement must be in
writing and agreed to by the parties. It states that “this Appointment expresses fully the
understanding, and that all prior understandings are hereby cancelled, and no future
changes in the terms of this Appointment shall be valid, except when and if reduced to
writing and signed by both the Bottler and the Company, by legally authorized officials.”
App. I at 589. Here, Pittsburg Pepsi provides no evidence of a signed writing that
modified the terms of the original Pepsi-Cola EBA. Nor has Pittsburg Pepsi presented
any authority to establish that the contract modification, resulting in a contract for more
than $500 and lasting into apparent perpetuity, would not be barred by the statute of
frauds. Instead, Pittsburg Pepsi cites several cases holding that the parties’ course of
performance waived the terms of their original contract. In those cases, however, the
courts relied on N.Y. U.C.C. § 2-208(1) to conclude that the parties’ contract was
modified where there was one contract which the delivering party repeatedly altered
without objection by the receiving party. See Hyosung Am., Inc. v. Sumagh Textile Co.,
137 F.3d 75, 80 (2d Cir. 1998) (holding because purchaser accepted three shipments of
nonconforming goods without objection, it acquiesced in accepting future shipments of
same nonconforming goods and could not refuse to pay for future nonconforming goods);
Pepsi-Cola Bottling Co. of Asbury Park v. PepsiCo, Inc., 297 A.2d 28, 33 (Del. 1972)
21
(holding if the parties contractually agreed on a price, but one party began changing the
price and the other repeatedly paid that price, neither party could seek to enforce the
agreed-upon price because they had acquiesced to a change in the course of performance).
Pittsburg Pepsi’s contract modification claim differs from these cases because here, the
parties’ repeated actions did not modify an existing contract entitling Pittsburg Pepsi to
any new products; rather, the parties entered into successive contracts, each entitling
Pittsburg Pepsi to additional contracted-for products. These successive contracts are
legally distinct agreements, not modifications of the original EBA. We conclude the
district court correctly granted PepsiCo summary judgment on Pittsburg Pepsi’s “contract
modification by course of dealing” claim.
Relying on the same course of performance evidence, Pittsburg Pepsi argues that
PepsiCo’s repeated decision to offer Pittsburg Pepsi bottling rights to new products
created an “implied-in-fact” contract entitling Pittsburg Pepsi to be offered new products.
The district court ruled in PepsiCo’s favor on this claim, concluding Pittsburg Pepsi’s
alleged “implied agreement fails for lack of consideration.” We agree with the district
court’s conclusion, but we reach that conclusion by applying a different analysis. See
Perry v. Woodward, 199 F.3d 1126, 1141 n.13 (10th Cir. 1999) (noting appellate court
may affirm for any reason supported by the record).
Under New York law, theories of express contract and a contract implied in fact
are mutually exclusive: a contract cannot be implied in fact where an express contract
covers the subject matter involved. The logic underlying this rule has been explained as
22
follows:
[Implied-in-fact] contracts arise in the absence of an express agreement and
are based on the conduct of the parties, from which a fact finder may fairly
infer the existence and terms of a contract. But the prerequisite for such a
contract is that there be no express agreement dealing with the same subject
matter. Where, as here, there is an express agreement covering the subject
matter of the alleged implied-in-fact agreement, the implied-in-fact
agreement is precluded as a matter of law. The logic at work here is
obvious: If the parties have an express contract that deals with a subject, it
makes little sense to conclude that they in fact agreed to additional terms
but simply decided to leave them out of the express contract. Indeed, the
merger clause in the agreement in this case bears out that logic.
Radio Today, Inc. v. Westwood One, Inc., 684 F. Supp. 68, 71 (S.D.N.Y. 1988) (internal
citations omitted). Additionally, although New York law permits a prior course of
dealing to interpret existing contracts, “[a] prior course of dealings . . . may not be used to
establish contract formation.” Fasolino Foods Co. v. Banca Nationale Del Lavoro, 761 F.
Supp. 1010, 1021 (S.D.N.Y. 1991).
In the present case, it is clear that Pittsburg Pepsi’s proposed implied-in-fact
contract, guaranteeing it a right to successive EBAs on new products, would cover the
same subject-matter that the parties have already reduced to writing on at least fourteen
separate occasions. Further, to the extent Pittsburg Pepsi believes the subject matter of
the implied contract would somehow be different from the existing contracts, New York
law does not permit the creation of an implied contract from a prior course of dealing.
We conclude Pittsburg Pepsi’s implied-in-fact contract claim must fail as a matter of law.
23
Failure to enforce the TEP
We next consider Pittsburg Pepsi’s assertion that PepsiCo breached the EBA by
failing to enforce the TEP. The district court concluded the EBA’s exclusive dealing
clause did not obligate PepsiCo to enforce the TEP. As such, since the EBA did not
explicitly mention the TEP elsewhere, the court analyzed whether the parties’ course of
dealing had modified the existing EBAs or implied a new term into the EBAs, requiring
PepsiCo to enforce the TEP. The court concluded “the EBAs . . . do not obligate PepsiCo
to protect plaintiff’s territory from transshipment.” App. XIX at 7709. On appeal,
Pittsburg Pepsi argues the district court’s narrow interpretation of the EBA misses the
point – by agreeing to make Pittsburg Pepsi the exclusive dealer of Pepsi products,
Pittsburg Pepsi contends PepsiCo is contractually obligated to prevent transshipment.
Under the UCC, "the meaning of the agreement of the parties is to be determined
by the language used by them and by their action, read and interpreted in the light of
commercial practices and other surrounding circumstances." N.Y. U.C.C. § 1-205, cmt.
1. Terms of a written agreement "may be explained or supplemented by course of dealing
or usage of trade or by course of performance.” N.Y. U.C.C. § 2-202(a). In analyzing the
obligations and rights the exclusive dealings clause imposed, we may consider post-
contract conduct because such conduct is the most persuasive evidence of the parties’
intentions. See N.Y. U.C.C. § 2-208, cmt. 1.
The key question here is whether the scope of PepsiCo’s obligations under the
EBA included an obligation to enforce the TEP. The EBA states that PepsiCo contracted
24
for Pittsburg Pepsi to be the “exclusive bottler, to bottle and distribute” the agreed-upon
Pepsi products. App. II at 586. Beginning with the initial EBA and in each EBA
thereafter, PepsiCo has reiterated Pittsburg Pepsi’s exclusivity rights and has publicly
stated that the promise of exclusivity was the most compelling reason for an independent
bottler to sign with PepsiCo. PepsiCo has stated in a complaint filed against an
independent bottler that:
To protect the bottler’s continuing investment and to encourage the
bottler to fully develop its business, PepsiCo appoints each bottler to an
exclusive territory to the exclusion of all other bottlers and, except for
certain national syrup accounts, protects the bottler from competition from
PepsiCo itself. Each PepsiCo bottler . . . enjoys these same benefits and
protection under the terms of its exclusive bottling appointment.
App. XIV at 5576 (emphasis added). In consideration of the right to be the exclusive
dealer and the benefits attending that right, Pittsburg Pepsi and other independent bottlers
agreed to do several things, including aggressively marketing PepsiCo products and not
distributing competing beverages. One of the specific steps PepsiCo took to protect the
exclusive rights granted to Pittsburg Pepsi under its original EBA was to create the
transshipment enforcement program (TEP) and its Transshipment Department to enforce
the program. The main responsibility of the Transshipment Department is to investigate
and fine transhipping. Id. at 5896.
Moreover, although Pittsburg Pepsi has stated a separate claim for breach of the
implied duty of good faith and fair dealing, under New York law “breach of that duty is
merely a breach of the underlying contract.” Harris v. Provident Life & Acc. Ins. Co.,
25
310 F.3d 73, 80 (2d Cir. 2005) (internal quotation marks omitted), and this duty strongly
reinforces Pittsburg Pepsi’s transshipment claim. The covenant of good faith and fair
dealing forbids a party to “do anything which will have the effect of destroying or
injuring the right of the other party to review the fruits of the Contract.” 511 West 232nd
Owners Corp. v. Jennifer Realty Co., 773 N.E.2d 496, 500 (N.Y. 2002) (internal
quotation marks omitted). Transshipments could undermine the value of Pittsburg
Pepsi’s exclusive franchise. If, for example, Pittsburg Pepsi’s present and potential
customers decided to buy all their product from a Sam’s Club outside Pittsburg Pepsi’s
territory, Pittsburg Pepsi’s franchise would become worthless. Accordingly, PepsiCo
must refrain from conduct that creates an unreasonable risk that it will generate
transshipments into Pittsburg Pepsi’s territory unless it also polices the matter to deter
transshipments.
We conclude – based both on the original EBA’s text, parties’ subsequent actions,
and the implied covenant of good faith and fair dealing – that PepsiCo had a duty to take
reasonable steps to prevent competing bottlers from encroaching on Pittsburg Pepsi’s
exclusive territory.
The more difficult question is whether there is sufficient evidence to create a
question of material fact that PepsiCo did not protect Pittsburg Pepsi’s territory.
PepsiCo’s alleged failure to enforce the TEP becomes relevant at this juncture. That is,
although the EBAs do not mention the TEP, evidence that PepsiCo failed to enforce the
TEP, while simultaneously taking no other action to prevent transshipment, would tend to
26
prove that PepsiCo failed to perform its contractual obligations. See So. Implement Co.
v. Deere & Co., 122 F.3d 503, 507 (8th Cir. 1997) (concluding summary judgment
improperly granted to supplier where contract did not grant distributor exclusive territory,
because distributor’s general rights under contract coupled with parties’ long course of
performance could support jury finding that distributor had exclusive rights which
supplier was required to enforce).9
Here, Pittsburg Pepsi has presented several facts which pertain to PepsiCo’s
alleged failure to protect Pittsburg Pepsi’s right to territorial exclusivity. First, and most
damaging to PepsiCo, is the evidence relating to Lawrence. Until 2002, Lawrence
appeared on both PepsiCo and Bottling Group’s payrolls, simultaneously serving as
PepsiCo’s vice president of franchise development and transshipment enforcement
director, and Bottling Group’s point person for bottler acquisition. Thus, while Lawrence
was working on PepsiCo’s behalf to help independent bottlers grow and develop, he was
leading Bottling Group’s efforts to acquire dysfuctional bottlers. There is no dispute that
PepsiCo had classified Pittsburg Pepsi as a dysfunctional bottler and that PepsiCo had
decided it would “invest [in Pittsburg Pepsi] only to prevent dysfunction.” App. IV at
1301. One could thus infer from these facts that PepsiCo had little interest in protecting
9
As the Eighth Circuit further explained:
[A] jury could find that once [the supplier] was informed that a dealer was
operating any unauthorized facility in another dealer’s [territory], [the
supplier] had a duty to investigate, and, if necessary, to prevent the dealer
from operating the unauthorized facility by the same mechanisms [the
supplier] would use to prevent other unauthorized dealer activity.
122 F.3d at 507.
27
Pittsburg Pepsi’s territory, which PepsiCo admittedly was working to acquire.
Second, PepsiCo made several decisions which had the effect of encouraging
Pittsburg Pepsi’s customers to purchase Pepsi product from sources outside Pittsburg
Pepsi’s territory. While PepsiCo targeted unaligned bottlers, it simultaneously used the
CDAs and MIAs to increase sales to major national chains such as Sam’s Club. PepsiCo
then worked with its anchor bottlers (including Bottling Group) to develop business with
these national chains. Thus, as PepsiCo nationalized its marketing strategy and moved
toward alignment, Pittsburg Pepsi’s customers began going to Bottling Group’s territory
to obtain (and transship) discounted Pepsi products from national customers. From these
facts, one could infer that PepsiCo created incentives for Pittsburg Pepsi’s customers to
purchase product from large chains, but then took inadequate steps to police the
anticipated transshipment that followed. Finally, Pittsburg Pepsi repeatedly complained
to PepsiCo about transshipment. It is unclear the extent to which PepsiCo responded to
these complaints or whether it made any effort to train Bottling Group employees to
prevent transshipment.
Viewing this evidence in a light most favorable to Pittsburg Pepsi, we believe a
jury could conclude that PepsiCo knew transshipment was occurring and, despite
promising to make Pittsburg Pepsi the exclusive PepsiCo dealer, chose to permit the
transshipment with the hope of weakening the franchise of a dysfunctional bottler. We
therefore conclude the EBAs required PepsiCo to protect Pittsburg Pepsi’s territory, but
that a question of material fact remains as to whether PepsiCo breached the EBAs’
28
exclusivity clause by not protecting Pittsburg Pepsi’s rights as an exclusive dealer.
Implied covenant of good faith and fair dealing
Pittsburg Pepsi’s final breach of contract claim is that PepsiCo breached the
covenant of good faith and fair dealing implied in the EBAs. Pittsburg Pepsi contends
PepsiCo breached this covenant by: (1) refusing to offer Pittsburg Pepsi EBAs for new
products; (2) failing to adequately enforce Pittsburg Pepsi’s right to be the exclusive
dealer of Pepsi products in its defined territory; and (3) engaging in discriminatory
wholesale pricing and withholding discounts.
Under New York law, every contract carries with it an implied duty of good faith
and fair dealing. Dalton v. Educ. Testing Serv., 663 N.E.2d 289, 291 (N.Y. 1995). “This
covenant embraces a pledge that neither party shall do anything which will have the effect
of destroying or injuring the right of the other party to receive the fruits of the contract.”
511 West 232nd Owners Corp., 773 N.E.2d at 500 (internal quotation omitted). “Where
the contract contemplates the exercise of discretion, this pledge includes a promise not to
act arbitrarily or irrationally in exercising that discretion.” Dalton, 663 N.E.2d at 291.
“Encompassed within the implied obligation of each promisor to exercise good faith are
any promises which a reasonable person in the position of the promisee would be justified
in understanding were included.” Id. (internal quotation omitted). “The covenant is
violated when a party to a contract acts in a manner that, although not expressly forbidden
by any contractual provision, would deprive the other of the right to receive the benefits
29
under their agreement.” Don King Prod., Inc. v. Douglas, 742 F. Supp. 741, 767
(S.D.N.Y. 1990).
The implied duty of good faith and fair dealing is not without limitation. It “does
not provide a court carte blanche to rewrite the parties' agreement,” and “the mere
exercise of one's contractual rights, without more, cannot constitute . . . a breach” of the
implied covenant of good faith and fair dealing. Hartford Fire Ins. Co. v. Federated Dep't
Stores, Inc., 723 F. Supp. 976, 991 (S.D.N.Y. 1989) (internal quotation omitted). Rather,
“it simply ensures that parties to a contract perform the substantive, bargained-for terms
of their agreement and that parties are not unfairly denied express, explicitly bargained
for benefits.” Don King Prod., 742 F. Supp. at 767 (internal quotation omitted).
Additionally, courts are not “at liberty to impose obligations under the guise of the
implied covenant which are inconsistent with the terms of the contract from which the
covenant is to be implied.” In re Minpeco, USA, Inc., 237 B.R. 12, 26 (S.D.N.Y. 1997).
Thus, “[a] party which acts in accordance with rights expressly provided in a contract
cannot be held liable for breaching an implied covenant of good faith.” Id. at 26. “The
plaintiff can maintain its claim for breach of the implied covenant of fair dealing ‘only if
it is based on allegations different than those underlying the accompanying breach of
contract claim.’” Concesionaria DHM, S.A. v. Int’l Fin. Corp., 307 F. Supp. 2d 553, 564
(S.D.N.Y. 2004) (internal quotation omitted). New York courts therefore routinely
dismiss claims for breach of an implied covenant of good faith and fair dealing as
“redundant since a breach of an implied covenant of good faith and fair dealing is
30
intrinsically tied to the damages allegedly resulting from a breach of the contract.” OHM
Remediation Servs. Corp. v. Hughes Envtl. Sys., Inc., 952 F. Supp. 120, 125 (N.D.N.Y.
1997) (internal quotation omitted).
We conclude that PepsiCo did not breach the implied covenant of good faith and
fair dealing by failing to offer Pittsburg Pepsi EBAs for new Pepsi products. As we have
noted, nothing in the existing EBAs entitled Pittsburg Pepsi to be offered subsequent
EBAs. Nor did the parties enter into a general franchise agreement entitling Pittsburg
Pepsi to all PepsiCo products. Rather, the parties agreed, through a series of individual
EBAs, that Pittsburg Pepsi would be the sole bottler and distributor of the contracted-for
Pepsi product. To read the EBAs as impliedly requiring PepsiCo to offer Pittsburg Pepsi
EBAs for all new Pepsi products in perpetuity would impose additional obligations on
PepsiCo beyond what a reasonable person would expect. To expand the existing EBAs to
imply this additional covenant would be contrary to New York law. See Primavera
Familienstiftung v. Askin, 130 F. Supp. 2d 450, 531 (S.D.N.Y. 2001)(stating “the duty of
good faith cannot be used to create independent obligations beyond those agreed upon
and stated in the express language of the contract”).
As regards Pittsburg Pepsi’s claim that PepsiCo violated the implied covenant by
denying it territorial protection and failing to enforce the TEP, this claim was addressed
earlier and is encompassed within Pittsburg Pepsi’s breach of the EBA’s exclusive
dealing clause. In support of this allegation, Pittsburg Pepsi principally relies on two
facts: PepsiCo’s decision to encourage Bottling Group to become partners with major
31
third-party vendors (regardless of the transshipment consequences) and PepsiCo’s
decision to ignore Pittsburg Pepsi’s transshipment complaints. These are the same facts
that support Pittsburg Pepsi’s assertion that PepsiCo breached the EBAs by failing to
protect Pittsburg Pepsi’s right to territorial exclusivity.
Finally, we must rule in PepsiCo’s favor on Pittsburg Pepsi’s claim that PepsiCo
breached the implied covenant of good faith and fair dealing by failing to give Pittsburg
Pepsi advertising funds and other financial support. Pittsburg Pepsi argues that PepsiCo
has used the CDAs to reduce the price its largest customers pay (by providing those
customers with rebates) while simultaneously using the MIAs to penalize those
independent bottlers that refuse to contribute to the rebates (by refusing to provide those
bottlers with marketing funds). Through this scheme, Pittsburg Pepsi contends “PepsiCo
uses funding as a tactic to extract CDA ‘compliance’ when it knows this violates bottlers’
fundamental pricing (and discounting) relationships within their own territories.” Aplt.
Br. at 67. According to Pittsburg Pepsi, these actions violate the “implied covenant of
good faith and fair dealing to provide plaintiff with an opportunity to receive ordinary
bottler funding from concentrate revenues.” Id. Although Pittsburg Pepsi speculates
“[t]here are many discretionary funds regularly paid by PepsiCo to its bottlers, and those
funds are tied – at least on their face – to different programs,” the only such funds
referenced in the record are the advertising funds available under the MIA. Id.To determine whether PepsiCo’s failure to give Pittsburg Pepsi advertising funds
violated an implied covenant of good faith and fair dealing, our analysis again begins
32
with the source of this proposed covenant – the text of the EBA. The original EBA states
that Pittsburg Pepsi:
must fully cooperate in and vigorously push the Company’s cooperative
advertising and sales promotion programs and campaigns for the Territory.
In addition the Bottler will actively advertise, in all reasonable media
including adequate point-of-purchase advertising, and vigorously engage in
sales promotions of, bottled Pepsi-Cola throughout the Territory at his own
cost and expense.
App. II at 587 (emphasis added). As we read this provision, Pittsburg Pepsi was required
to (1) promote PepsiCo’s sales promotion programs, and (2) pay for its own advertising
costs. Because Pittsburg Pepsi assumed these contractual obligations, we cannot expand
the implied covenant to hold PepsiCo liable for failing to provide Pittsburg Pepsi
advertising funds.
Tortious interference by Bottling Group and PepsiCo
We next consider Pittsburg Pepsi’s claim that Bottling Group and PepsiCo
tortiously “interfer[ed] with Pittsburg Pepsi’s advantageous business relationship with its
customers and prospective customers located in the Pittsburg Territory.” App. II at 540.10
10
In its Second Amended Complaint, Pittsburg Pepsi included a separate claim
against Bottling Group for “intentionally inducing the violation of Pittsburg Pepsi’s
contractual rights” with PepsiCo. App. II at 540. On appeal, however, Pittsburg Pepsi
does not set out the requisite legal elements to succeed on a tortious interference with
contractual relations claim and instead focuses solely on the elements needed to prove
tortious interference with a current or prospective business advantage. Additionally,
rather than arguing that Bottling Group tortiously interfered with Pittsburg Pepsi’s and
PepsiCo’s contractual relations, Pittsburg Pepsi now claims that Bottling Group and
PepsiCo were jointly involved in one tortious interference scheme. Although we are
inclined to conclude Pittsburg Pepsi has waived its tortious interference with contractual
rights claim, we nevertheless conclude on the merits that Bottling Group is entitled to
summary judgment on the claim.
33
To prevail on a claim for tortious interference with current or prospective business
advantage under Kansas law, Pittsburg Pepsi must show
(1) the existence of a business relationship or expectancy with the
probability of future economic benefit to the plaintiff; (2) knowledge of the
relationship or expectancy by the defendant; (3) that, except for the conduct
of the defendant, plaintiff was reasonably certain to have continued the
relationship or realized the expectancy; (4) intentional misconduct by
defendant; and (5) damages suffered by plaintiff as a direct or proximate
result of defendant's misconduct.
PulseCard, Inc. v. Discover Card Servs., Inc., 917 F. Supp. 1488, 1498 (D. Kan. 1996).
To establish a tortious interference claim, a plaintiff must show that defendant acted with
malice. L&M Enters., Inc. v. BEI Sensors & Sys. Co., 231 F.3d 1284, 1288 (10th Cir.
2000). In Kansas, malice is defined as acting with “actual evil-mindedness or specific
intent to injure.” Turner v. Halliburton Co., 722 P.2d 1106, 1113 (Kan. 1986).
The district court concluded that Pittsburg Pepsi’s tortious interference claim failed
on the third prong of the analysis because defendants’ actions were not the “but for”
cause for Pittsburg Pepsi’s customers purchasing product from others. App. XIX at 7735.
With regard to the fourth prong, the court determined “the record contains no evidence of
To recover on a tortious interference with a contract claim under Kansas law, a
plaintiff must prove (1) the existence of a contract; (2) Bottling Group’s knowledge
thereof; (3) its intentional procurement of a breach; (4) the absence of justification; and
(5) damages resulting therefrom. Dickens v. Snodgrass, Dunlap & Co., 872 P.2d 252,
257 (Kan. 1994). Applying these elements, the district court granted Bottling Group’s
motion for summary judgment, concluding there was no evidence that Bottling Group had
induced PepsiCo to breach the EBAs. We similarly find no evidence that Bottling Group
procured PepsiCo’s breach of the EBA. To the contrary, Pittsburg Pepsi’s theory was that
PepsiCo encouraged Bottling Group to take actions detrimental to Pittsburg Pepsi.
Because Pittsburg Pepsi has not established that Bottling Group intentionally procured a
breach, we conclude summary judgment was properly granted.
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malicious intent.” Id. at 7736. Like the district court, we conclude Pittsburg Pepsi has
established the first and second prongs – it is clear that Pittsburg Pepsi had established
relationships with its customers and that both defendants knew about the relationships.
Additionally, we conclude that, because there is evidence that third-party vendors
purchased products from Bottling Group instead of Pittsburg Pepsi and that Pittsburg
Pepsi incurred losses, if Pittsburg Pepsi has presented evidence giving rise to a question
of material fact as to the third and fourth elements, summary judgment was improperly
granted. We therefore focus our inquiry on the third and fourth tortious interference
elements and separately review the evidence as it pertains to Bottling Group and PepsiCo.
Bottling Group. Pittsburg Pepsi’s toughest hurdle on its tortious interference claim
is to show that, except for each defendant’s conduct, Pittsburg Pepsi was reasonably
certain to have continued a business relationship or realized the expectancy of a business
relationship with a customer. Although this is a difficult element to prove, when viewing
the evidence in a light most favorable to Pittsburg Pepsi, we conclude Pittsburg Pepsi has
presented sufficient evidence to withstand summary judgment on the tortious interference
claim against Bottling Group as regards its claim involving SEK.
The evidence pertaining to Bottling Group’s involvement with SEK suggests that
Bottling Group’s actions encouraged SEK to tranship into Pittsburg Pepsi’s territory
rather than purchase Pepsi products from Pittsburg Pepsi. Here, the evidence reflects that
over a five-year period spanning from 1997 to 2002, SEK used its registered account at
Sam’s Club in Joplin, Missouri, to purchase approximately 90 percent of its Pepsi
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products for resale in Pittsburg Pepsi’s territory. App. XIX at 7684. According to
Lawrence, these continued purchases of large quantities of products should have triggered
an investigation into SEK’s possible resale of the product. Id. During this period,
Pittsburg Pepsi repeatedly complained to Bottling Group about SEK’s transshipment, but
Bottling Group stated it had no knowledge of the transshipment. Id.; App XV at 6037.
However, as early as 1990, the major soft-drink distributors were actively engaged in
limiting transshipment through large stores like Sam’s Club. Although Bottling Group
may be able to establish it had no knowledge of the extent to which SEK was purchasing
products from Sam’s Club, we cannot reach that conclusion on the record before us. We
conclude Pittsburg Pepsi has proven that a question of material fact remains as to whether
Pittsburg Pepsi would have obtained SEK’s business but for Bottling Group’s actions.
Similarly, as to the fourth element of a tortious interference claim, we conclude a jury
could interpret the foregoing evidence as evidence of Bottling Group’s intent to take
Pittsburg Pepsi’s customers. We therefore reverse the district court’s grant of summary
judgment to Bottling Group on Pittsburg Pepsi’s tortious interference claim against
Bottling Group as regards SEK.
PepsiCo. Pittsburg Pepsi’s tortious interference claim against PepsiCo presents a
closer question. Pittsburg Pepsi claims that PepsiCo’s long-term business plan,
administrative structure, and failure to enforce the TEP collectively equate to tortious
interference. To determine whether Pittsburg Pepsi has proven that a question of material
fact remains on this claim, we again examine whether there is evidence (1) that, but for
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PepsiCo’s conduct, Pittsburg Pepsi was reasonably certain to continue its customer
relationships or realize an expectancy of future business, and (2) of intentional
misconduct by PepsiCo.
Pittsburg Pepsi relies on three sets of facts to establish that PepsiCo’s conduct
caused it to lose current and prospective business. First, Pittsburg Pepsi again focuses
extensively on the fact that Lawrence was jointly involved in bottler development (for
PepsiCo) and bottler acquisition (for Bottling Group). Second and relatedly, Pittsburg
Pepsi relies on PepsiCo’s decision to expand the sale of its products at discounted rates to
major retailers while simultaneously failing to enforce its transshipment policies.
Pittsburg Pepsi alleges these actions were part of PepsiCo’s larger plan to drive the
independent bottlers out of business. Third, Pittsburg Pepsi seeks to hold PepsiCo
responsible for any tortious actions taken by Bottling Group based on its theory that
Bottling Group was acting on PepsiCo’s behalf in effectuating PepsiCo’s long-term plan
to reduce the number of bottlers.
We note that Pittsburg Pepsi has provided no evidence that PepsiCo
directly interfered with Pittsburg Pepsi’s business. Instead, Pittsburg Pepsi asks us to
infer that, because PepsiCo created a climate which made it possible for Pittsburg Pepsi’s
customers to purchase products from another bottler, PepsiCo should be held liable for
intentionally causing Pittsburg Pepsi’s customers to purchase from others. Further,
Pittsburg Pepsi asks us to conclude, consistent with the third element of a tortious
interference claim, that this climate was the but for cause of its loss of business.
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However, absent evidence that PepsiCo’s conduct caused Pittsburg Pepsi’s customers to
purchase products from another bottler at a cheaper price, PulseCard, 917 F. Supp. at
1498, Pittsburg Pepsi cannot survive PepsiCo’s summary judgment motion on Pittsburg
Pepsi’s tortious interference claim. We therefore conclude the district court properly
granted PepsiCo summary judgment on Pittsburg Pepsi’s tortious interference claim.
Third-party beneficiary claim
Pittsburg Pepsi claims that Bottling Group’s transshipment breached the clause in
the MBA and the pre-anchor EBAs between PepsiCo and Beverage Products Corporation
(Bottling Group’s predecessor) in which Bottling Group promised PepsiCo it would not
sell Pepsi products outside Bottling Group’s territory. Pittsburg Pepsi is not a party to the
MBA or the EBAs between PepsiCo and Beverage Products Corporation, but contends it
can nevertheless enforce the agreements as a third-party beneficiary. The district court
determined that Pittsburg Pepsi was not a third-party beneficiary to any of Bottling
Group’s agreements with PepsiCo and granted Bottling Group’s motion for summary
judgment on Pittsburg Pepsi’s third-party beneficiary claim.
Under New York law, “only an intended beneficiary of a contract may assert a
claim as a third-party beneficiary.” Mortise v. United States, 102 F.3d 693, 696 (2d Cir.
1996). A third party is an intended beneficiary where (1) no one other than the third party
can recover if the promisor breaches the contract, or (2) the language of the contract
otherwise clearly evidences an intent to permit enforcement by the third party. Piccoli
A/S v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157, 162 (S.D.N.Y. 1998). “Although
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a party need not necessarily be specifically mentioned in a contract to be considered a
third-party beneficiary, the parties' intention to benefit the third party nonetheless must be
revealed on the face of the agreement.” Id. at 163 (internal quotation omitted). A
plaintiff “must plead facts to establish that it is an ‘intended’ beneficiary of a contract and
not merely an ‘incidental’ beneficiary.” Flack v. Friends of Queen Catherine Inc., 139 F.
Supp. 2d 526, 538 (S.D.N.Y. 2001).
Pittsburg Pepsi’s third-party beneficiary claim fails under the first test. Both the
MBA and the EBA plainly permit someone other than Pittsburg Pepsi to recover if
Bottling Group breaches the contract. The MBA states in paragraph 16(b) that “[i]n
addition to all other remedies [PepsiCo] may have against any Transhipping Bottler” for
violating the transshipment provisions, PepsiCo can recover from Bottling Group
specified transshipment charges. App.Vol. II at 689. Similarly, the EBA provides that
PepsiCo, “in addition to all other rights and remedies, including [its] right to damages
sustained,” may terminate the Appointment if certain designated events occur. Id. at 588.
Pittsburg Pepsi’s third-party beneficiary claim fares no better under the second
test. The MBA’s text contains no proof that the parties intended that Pittsburg Pepsi (or
any third party) retain the right to enforce the agreement. Moreover, the parties’ practice
fails to evince such an intent. Rather, when a third-party bottler suspects transshipment,
the record reveals the normal practice is for the third-party bottler to report the alleged
transshipment to PepsiCo who, in turn, enforces the MBA’s anti-transshipment
provisions. Pittsburg Pepsi repeatedly followed this practice. As a result, of course,
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Pittsburg Pepsi incidentally benefitted from the MBA because Pittsburg Pepsi’s territory
was protected, but that incidental benefit alone does not confer a right to enforce the
MBA. Likewise, Pittsburg Pepsi’s third-party beneficiary claim premised on the EBA
also fails. Again, the EBA contains no language suggesting the parties intended to confer
upon a third-party bottler a right to recover for a breach of another bottler’s contract with
PepsiCo. We therefore conclude that under New York law, Pittsburg Pepsi is not an
intended beneficiary of either the MBA or the EBA and that the district court properly
granted Bottling Group summary judgment on Pittsburg Pepsi’s third-party beneficiary
claim.
Breach of fiduciary duty by PepsiCo
Pittsburg Pepsi also claims PepsiCo breached certain fiduciary duties by (1) failing
to fairly and fully enforce its transshipment program; (2) failing to consider the best
interest of bottlers in CDA negotiations; (3) undercutting Pittsburg Pepsi’s right to
determine prices and other terms of territory product sales; and (4) retaliating against
Pittsburg Pepsi by withholding new products and funding because of Pittsburg Pepsi’s
refusal to participate in the CDAs. The district court concluded that Pittsburg Pepsi failed
to show that PepsiCo owed it any fiduciary duties and granted PepsiCo’s motion for
summary judgment.
Kansas law recognizes two types of fiduciary relationships: (1) those specifically
created by contract or by formal legal proceedings, and (2) those implied in law due to the
factual situation surrounding the involved transactions and the relationship of the parties
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to each other and to the questioned transactions. Rajala v. Allied Corp., 919 F.2d 610,
614 (10th Cir. 1990) (citing Denison State Bank v. Madeira, 640 P.2d 1235, 1241 (Kan.
1982)). Here, as in Rajala and Denison, because there is no evidence that a fiduciary duty
was created by a contract or formal legal proceedings, the only question remaining is
whether the facts presented support an implied fiduciary duty.
Determination of whether a court should imply a fiduciary relationship “depends
on the facts and circumstances of each individual case.” Denison, 640 P.2d at 1241. The
Kansas Supreme Court has set forth certain broad principles for courts to apply in making
this determination:
A fiduciary relationship imparts a position of peculiar confidence placed by
one individual in another. A fiduciary is a person with a duty to act
primarily for the benefit of another. A fiduciary is in a position to have and
exercise, and does have and exercise influence over another. A fiduciary
relationship implies a condition of superiority of one of the parties over the
other. Generally, in a fiduciary relationship, the property, interest or
authority of the other is placed in the charge of the fiduciary.
Id. Additionally, the Kansas Supreme Court has stated that “conscious assumption of the
alleged fiduciary duty is a mandatory element under Kansas law.” Rajala, 919 F.2d at
615. Kansas courts have not addressed whether a distributorship or franchise relationship
creates fiducial obligations. Applying the holdings in Denison to the facts presented, we
must therefore predict how Kansas’ highest court would rule on this question. See
Vanover v. Cook, 260 F.3d 1182, 1186 (10th Cir. 2001) (noting “[i]n the absence of
definitive direction from the highest court of the state of Kansas, we must predict the
course that body would take if confronted with the issue”).
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In Pizza Management, Inc. v. Pizza Hut, Inc., 737 F. Supp. 1154, 1183 (D. Kan.
1990), the court applied Denison to determine “whether Kansas law would recognize a
franchise relationship to implicate fiducial obligations and, if not, then whether the facts
and circumstances between the parties could justify implying a fiducial relation.” The
court explained:
The franchisor -- franchisee relationship is an arms-length,
commercial one with the performance of each governed and regulated by
the typically exhaustive terms of written franchise agreements. It is the very
nature of franchising that both parties enter into their agreement trusting on
the fairness and good faith of the other. Fiduciary obligations should be
extended reluctantly to commercial or business transactions.
Plaintiffs refer to numerous terms of the franchise agreements which
they believe show [defendant’s] overweening control of the franchisees'
operation and performance. Taken individually or together, these instances
of discretion or authority under the contract do not make [defendant]
anything more than a common franchisor. A franchisee's reasonable
expectations are sufficiently protected by the standard of good faith and fair
dealing governing the franchisor's exercise of contractual responsibilities
and powers. This court has no cause to believe Kansas law would impose
fiducial obligations on a franchisor for the sole reason of that status.
Id. at 1183 (internal quotations and citations omitted). Applying these principles, the
court concluded that, because there was no mention of a fiducial relationship in the
contract and because there was no evidence to show that plaintiffs placed any confidence
and trust in defendants beyond that inherent in any relationship between a franchisor and
franchisee, plaintiffs had not raised a “triable issue of fact” as to whether fiducial
obligations existed. Id. Since Pizza Hut, courts applying Kansas law to franchisee suits
against franchisors have uniformly refused to find a fiduciary relationship absent proof
that the parties assumed fiduciary duties apart from their standard relationship. See, e.g.,
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Rajala, 919 F.2d at 622-23; Wayman v. Amoco Oil Co., 923 F. Supp. 1322 (D. Kan.
1996); Bank IV Salina N.A. v. Aetna Cas. & Sur. Co., 810 F. Supp. 1196, 120607 (D.
Kan. 1992).
Applying these cases and Denison’s holding to the facts at bar, we conclude the
evidence presented does not support the creation of an implied fiduciary relationship
between Pittsburg Pepsi and PepsiCo. Pittsburg Pepsi has not shown that its relationship
with PepsiCo is anything more than a standard business relationship, or that Pittsburg
Pepsi imparted a particular confidence in PepsiCo. To the contrary, we find the evidence
persuasively indicates the two parties were businesses acting at arms-length. Pittsburg
Pepsi consistently has acted independently by not sharing any information regarding its
franchise with PepsiCo. Similarly, because the EBAs authorized Pittsburg Pepsi to set its
own prices, PepsiCo was powerless in cases where Pittsburg Pepsi ran into conflicts with
its local customers due to the higher prices Pittsburg Pepsi charged. If Pepsico really was
Pittsburg Pepsi’s fiduciary, PepsiCo would have been able to exercise more control over
Pittsburg Pepsi. Finally, and most importantly, there is no evidence that PepsiCo
consciously assumed any fiduciary responsibilities. Absent such proof, Kansas law does
not permit us to imply a fiduciary relationship. We conclude the district court properly
granted PepsiCo’s motion for summary judgment on the breach of fiduciary duty claim.
Civil conspiracy by PepsiCo and Bottling Group
Pittsburg Pepsi claims that PepsiCo and Bottling Group engaged in an unlawful
civil conspiracy to tortiously interfere with Pittsburg Pepsi’s customers. A civil
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conspiracy is not actionable under Kansas law without commission of some wrong giving
rise to a tortious cause of action independent of conspiracy. Stoldt v. City of Toronto,
678 P.2d 153, 161 (Kan. 1984). “[T]he elements of a civil conspiracy include: (1) two or
more persons; (2) an object to be accomplished; (3) a meeting of the minds in the object
or course of action; (4) one or more unlawful overt acts; and (5) damages as the
proximate cause thereof.” Id. The district court summarily dismissed this claim because
it determined Pittsburg Pepsi had not alleged sufficient facts to create a triable issue on
the underlying tort claims. Because we have not found an actionable tort against PepsiCo,
we agree with the district court’s grant of summary judgment to PepsiCo on this claim.
Further, because two parties are needed to engage in a civil conspiracy, we conclude
Pittsburg Pepsi’s claim against Bottling Group must fail.
III.
We REVERSE the district court’s grant of summary judgment in favor of PepsiCo
on Pittsburg Pepsi’s breach of contract claim, which includes an implied duty of good
faith and fair dealing, premised on PepsiCo’s failure to protect Pittsburg Pepsi’s territorial
exclusivity. We REVERSE the district court’s grant of summary judgment in favor of
Bottling Group on Pittsburg Pepsi’s tortious interference with current and prospective
business relations claim as it relates to SEK. We REMAND these claims to the district
court for further proceedings. We AFFIRM the district court’s grant of summary
judgment on the remaining claims.
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