Ninth Circuit Rules Washington Suppliers and Manufacturers Can Contract to Permit Termination of the Distributor Relationship Without Cause and to Limit Remedies for Such Termination

The Ninth Circuit has recently vacated a preliminary injunction prohibiting the termination of a beer distribution agreement. In City Beverages, LLC v. Crown Imports, LLC, City Beverages sued Crown Imports when Crown Imports allegedly terminated the parties’ agreement without cause. The agreement made City Beverages the exclusive brewer, marketer, and supplier of several Crown Imports beer brands within a certain part of Washington State. City Beverages sued for a preliminary and permanent injunction to stop the termination.

The Ninth Circuit vacated and remanded the case holding City Beverages was unable to show a likelihood of success on the merits for three reasons.

First, Washington’s Wholesale Distributor/Supplier Equity Agreement Act allows suppliers or manufacturers to contract for the right to terminate distribution agreements without cause, even if the text of the act does not expressly state they universally have that right. The circuit court disagreed with the district court’s holding that the act uniformly requires suppliers “to give notice and cause before canceling contracts with distributors.” Instead, the court held that if a supplier contracts for the right to terminate a distribution agreement without cause, then under the act, that supplier can either (1) terminate for cause after providing the necessary statutory notice and period to cure any deficiencies and not owe any compensation to the distributor for said termination; or (2) terminate without cause and provide compensation for inventory and the fair market value of the terminated rights.

Second, the Ninth Circuit reviewed the text of the distribution agreement at issue and determined that Crown Imports did, indeed, have a contractual right to terminate without cause. The court focused on the agreement’s phrase “in the event of the termination of [the] Agreement by [Crown Imports] without cause.” The court held that to give all the language in the agreement meaning, it had to interpret that phrase as allowing for Crown Imports to terminate City Beverages without cause.

Third and finally, the court examined City Beverages’ claim for injunctive relief on the basis that the termination violated the Washington Franchise Investment Protection Act. In so doing, the court held that it is not clear that the franchise protection act even applied because the Wholesale Distributor/Supplier Equity Agreement Act already did. In other words, general statutory provisions (e.g., the Franchise Investment Protection Act) must yield to those more-specific statutes.

But, even if the Franchise Investment Protection Act did apply, City Beverages had likely waived its right to injunctive relief anyway under the plain terms of the distribution agreement. The court explained that the agreement’s specific text that Crown Imports “shall pay [City Beverages]” a specified sum “in full and complete satisfaction, waiver, and discharge of all claims of whatever nature that [City Beverages] may have against [Crown Imports], arising out of or with respect to the termination” controlled and acted as a waiver of City Beverages’ right to injunctive relief. While the Franchise Investment Protection Act may make termination of a franchise without cause unlawful, it does not require a particular form of remedy. Consequently, the parties could agree to limit any potential remedy arising from an unlawful termination to money damages instead of injunctive relief. In this case, the Ninth Circuit found the agreement text showed the parties’ clear intent to limit the available remedy to money damages.

Broadly, this case provides manufacturers and suppliers with some clarity about the application of two important statutes in Washington. In particular, the ruling is important because it confirms that suppliers in Washington may contract for the right to terminate a distributor without cause and agree to limit a distributor’s remedy.