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Luxco, Inc. v. Jim Beam Brands, Co.

United States District Court, N.D. Illinois, Eastern Division

January 30, 2017

LUXCO, INC., Plaintiff/Counter-Defendant,
v.
JIM BEAM BRANDS, CO., Defendant/Counter-Plaintiff.

          MEMORANDUM OPINION AND ORDER

          AMY J. ST. EVE, District Court Judge

         The parties tried this case before the Court in a three-day bench trial starting on November 28, 2016 and concluding on November 30, 2016. This Memorandum Opinion and Order sets forth the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52. For the following reasons, the Court finds:

1. Plaintiff/Counter-Defendant Luxco, Inc. (“Luxco”) did not establish by a preponderance of the evidence that Defendant/Counter-Plaintiff Jim Beam Brands Co.'s (“Beam”) breached the parties' express warranty in Section 3.14 of the parties' Asset Purchase Agreement (“APA”); and
2. Because Luxco failed to establish by a preponderance of the evidence that Beam breached Section 3.14 of the APA, Luxco's performance under the parties' Transaction Services Agreement (“TSA”) is not excused and Beam is entitled to judgment, costs, and prejudgment interest for Luxco's breach of the TSA.

         The Court directs the parties to meet and confer by February 13, 2017 on the amounts to be added to Beam's judgment for prejudgment interest and costs. If the parties cannot reach an agreement on the amounts to be added to the judgment, Beam must file a post-judgment brief setting out its position as to any outstanding disputes by February 20, 2017 and Luxco must file any objections to Beam's brief by February 27, 2017.

         BACKGROUND

         I. Procedural Background

         On June 6, 2016, the Court granted in part and denied in part Beam's Rule 56(a) motion for summary judgment. The remaining claims in this lawsuit include: (1) Count I of the First Amended Complaint in which Luxco alleges that Beam breached the express warranty in Section 3.14 of the parties' APA; and (2) Beam's breach of contract counterclaim in which Beam alleges that Luxco breached the parties' TSA. The Court presumes familiarity with all of its prior rulings in this lawsuit.

         At the November 2016 bench trial, the parties called the following witnesses: (1) Donn Lux, Luxco's Chairman and Chief Executive Officer; (2) Dan Streepy, Luxco's Executive Vice President of Sales; (3) David Bratcher, Luxco's President, Chief Operation Officer, and expert damages witness; (4) John Lee, Beam's former Vice President of Strategy and Corporate Development; (5) Martin Jones, Beam's industry and custom expert; and (6) Mark Gallagher, Beam's rebuttal damages expert. The parties further provided deposition designations for the following witnesses: (1) Kevin Cooke, Beam's former Vice President of Sales Strategy; (2) Anthony Truzzolino, Beam's former General Sales Manager for the Southern Region; (3) Patrick Hurrle, Vice President of Sales for Republic National Distributing Company (“RNDC”); (4) Tom Cole, RNDC's President; (5) Nicholas Fink, Beam's former Senior Vice President and Chief Strategy Officer; (6) Jared Fix, Beam's former General Manager of Cordials and Regional Brands; (7) William Newlands, Beam's former President of North America; and (8) John Lee, Beam's former Vice President of Strategy and Corporate Development.[1]

         II. Findings of Fact

         A. Introduction

         Luxco is a Missouri-based supplier and bottler of beverage alcohol products and is a privately held corporation. (R. 151-1, Sch. A, Stmt. Uncontested Facts ¶ 1; R. 180, 11/30 Trial Tr. at 662.) Beam is an Illinois-based supplier and bottler of beverage alcohol products and, as a publicly traded company, Beam must follow the United States Securities and Exchange Commission's (“SEC”) requirements. (Uncontested Facts ¶ 2; R. 179, 11/29 Trial Tr. at 373 (Lee).) In the United States, beverage alcohol products are sold and regulated under a three-tiered distribution system comprised of suppliers, distributors, and retailers. (Uncontested Facts ¶ 5.) Each tier in the distribution system consists of “entirely different, separate companies” with their own board of directors, ownership, and financial statements. (11/29 Trial Tr. at 381-82 (Lee); 11/30 Trial Tr. at 511 (Jones).) As alcohol suppliers, Beam and Luxco do not sell alcohol products directly to retail stores, bars, or restaurants. (Uncontested Facts ¶ 5.) Instead, Beam and Luxco sell alcohol products to third-party distributors, who in turn sell these products to retail stores, bars, and restaurants. (Id.) Moreover, distributors are sales and marketing companies that buy beverage alcohol products from suppliers and then sell, market, and deliver these products to retail customers. (11/29 Trial Tr. at 381-82 (Lee); 11/30 Trial Tr. at 522-23 (Jones).)

         In early 2012, Beam and Luxco began discussing Beam's potential sale to Luxco of the exclusive right to sell thirteen alcohol brands of alcohol beverages, which ultimately included Bellows® Blended, Bellows® Bourbon, Bellows® Gin, Bellows® Light Rum, Bellows® Scotch, Bellows® Vodka, Calvert® Extra, Calvert® Gin, Canada House® Canadian, Dark Eyes® Vodka, Lord Calvert® Canadian, Tempo® Triple Sec, and Wolfschmidt® Vodka (hereinafter the “Acquired Brands”). (Uncontested Facts ¶ 6.) The Acquired Brands were part of what Beam referred to colloquially as its “tail brands, ” “economy brands, ” or “value category, ” meaning brands that resulted in a lower profit margin for Beam than its more lucrative brands. (R. 151-7, Sch. G, Beam Stmt. Facts ¶ 15;[2] 11/29 Trial Tr. at 395-96 (Lee).) Before Beam's sale of the Acquired Brands to Luxco, third-party distributors, including Southern Wine and Spirits (“Southern”), RNDC, and Glazer's, distributed the Acquired Brands throughout the United States. (Uncontested Facts ¶ 7.) These three distributors account for approximately 80% of Beam's beverage alcohol sales. (Luxco Stmt. Facts ¶ 88.)

         B. The Parties' Agreements

         1. The Asset Purchase Agreement

         Luxco and Beam executed the APA on January 18, 2013 for a total purchase price of $70, 079, 014, under which Luxco acquired from Beam the exclusive right to sell the Acquired Brands. (Uncontested Facts ¶ 8; Luxco's Stmt. Facts ¶ 42; 11/29 Trial Tr. at 485 (Lee).) The parties agree that the APA is a valid contract and that it closed on January 31, 2013. (Uncontested Facts ¶¶ 8, 9; see also 11/29 Trial Tr. at 485 (Lee).) As part of the APA negotiations, Luxco bargained for and negotiated the terms, warranties, and conditions of the sale of the Acquired Brands from Beam to Luxco. (Luxco Stmt. Facts ¶¶ 7, 44.) Specifically, Luxco bargained for and purchased the representations and warranty in Section 3.14 of the APA. (Id. ¶ 45.) Section 3.14 states in its entirety:

Brand Detail Sheet. The Brand Detail Sheet provided by the Seller to the Purchaser attached as Schedule 3.14 is true, complete and accurate in all material respects.

(Beam Stmt. Facts ¶ 18a; PX-033; DX-001.) Schedule 3.14 is a spreadsheet that lists the Shipped Cases and Net Sales for the years 2009 through 2011 and the trailing twelve month period (“TTM period”) of October 2012 for all of the Acquired Brands. (11/29 Trial Tr. at 303, 305 (Bratcher); Beam's Stmt. Facts ¶ 23.) On the other hand, Schedule 3.14 does not reflect any information about the distributors' subsequent sales or shipments of the Acquired Brands to their retail customers. (R. 178, 11/28 Trial Tr. at 216 (Streepy); 11/29 Trial Tr. at 373-74 (Lee).) “Shipped cases” is a common term in the beverage alcohol industry referring to the number of cases that a supplier sells to its distributors. (11/28 Trial Tr. at 75 (Lux); 11/29 Trial Tr. At 374 (Lee); 11/30 Trial Tr. at 514 (Jones).) “Net sales” is a commonly used accounting term that is understood within the beverage alcohol industry. (11/30 Trial Tr. at 531 (Jones).) Net sales “refers to the net sales value after allowances, returns, discounts have been removed from ... gross sales.” (Id. at 531-32 (Jones).) Put differently, net sales are “gross sales less sales returns and allowances and sales discounts.” Barron's Dictionary of Accounting Terms, 273 (6th ed. 2014).

         The parties used the Brand Detail Sheet in their contract negotiations and it formed the basis of the parties' calculation of the purchase price for the Acquired Brands. (Luxco Stmt. Facts ¶ 24; 11/28 Trial Tr. at 91, 110-11 (Lux).) At trial, John Lee, Beam's former Vice President of Strategy and Corporate Development, testified that he was the lead corporate development person on the transaction and that he was directly involved in preparing Schedule 3.14 that reflects part of the original Brand Detail Sheet. (11/29 Trial Tr. At 369, 371, 373 (Lee).) He testified that - under his supervision - he asked Beam's accounting team to pull the historical net sales and case shipment data from Beam's financial reporting system, which is the same system that feeds into Beam's public financial statements that it reports to the SEC. (Id. At 373.)

         The APA also includes the following limitations:

3.20 Limitations. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR ANY ANCILLARY DOCUMENT, THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES OF OR CONCERNING THE PRODUCTS, THE ACQUIRED ASSETS OR THE ASSUMED CONTRACT AND HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES WITH RESPECT THERETO. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE SELLER DOES NOT MAKE ANY REPRESENTATION OR WARRANTY AS TO THE FUTURE SALES OR PROFITABILITY OF THE PRODUCTS. ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES, AND ALL REPRESENTATIONS AND WARRANTIES OTHER THAN THOSE SET FORTH IN THIS ARTICLE III, ARE HEREBY EXPRESSLY DISCLAIMED BY THE SELLER.

(Beam Stmt. Facts ¶ 18b.) Another relevant section of the APA is its integration clause, which states:

10.6. Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) and the Ancillary Documents, when executed and delivered, constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the ...

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