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Citri-Lite Co. v. Cott Beverages

June 11, 2010

THE CITRI-LITE COMPANY, A CALIFORNIA CORPORATION PLAINTIFF,
v.
COTT BEVERAGES, INC., DBA COTT BEVERAGES U.S.A., A FLORIDA CORPORATION, AND DOES 1 THROUGH 25, DEFENDANTS.



The opinion of the court was delivered by: Oliver W. Wanger United States District Judge

MEMORANDUM DECISION RE: DEFENDANT'S MOTION FOR SUMMARY JUDGMENT OR, IN THE JUDGMENT (DOC. 36)

ALTERNATIVE, PARTIAL SUMMARY

I. INTRODUCTION

Before the court is a motion for summary judgment or, in the alternative, partial summary judgment brought by Defendant Cott Beverages, Inc. ("Cott"). The motion is directed at the claims for breach of contract and breach of the implied covenant of good faith and fair dealing asserted by Plaintiff The Citri-Lite Company ("Citri-Lite").

In this removed diversity action, Citri-Lite contends that Cott breached its contractual obligation to use "commercially reasonable efforts" to promote and sell "Slim-Lite," a beverage that Citri-Lite created. In Cott's summary judgment motion, Cott argues that, under a proper interpretation of the contract, it satisfied its obligation to use commercially reasonable efforts to promote and sell Slim-Lite. Alternatively, Cott argues that CitriLite cannot establish that its purported damages were caused by any breach by Cott, and that Citri-Lite's damages theories are "legally unsound." The following background facts are taken from the parties' submissions in connection with the motion and other documents on file in this case.*fn1

II. BACKGROUND

A. The Parties

Cott is a Georgia corporation with its principal place of business in Tampa, Florida. (Doc. 40 at 2.) Cott produces and distributes non-alcoholic beverages including carbonated soft drinks, sparkling and flavored mineral waters, energy drinks, juice drinks, ready-to-drink teas, and other non-carbonated beverages. (Id.) Citri-Lite is a California corporation with its principal place of business in Grass Valley, California. (Id.) Citri-Lite incorporated in 1996 to produce and market Slim-Lite, a noncarbonated, zero calorie, fruit-flavored drink. (Id. at 2-3.) Between 1996 and 2002, Citri-Lite operated at a loss. (Id.)

B. The Licensing Agreement

On December 28, 2003, Citri-Lite and Cott entered into a written agreement entitled "Intellectual Property License And Purchase Option Agreement" ("Agreement"), which is governed by California law. (Doc. 17 at 6; Doc. 40 at 3.) The initial term of the Agreement is two (2) years, starting on December 28, 2003, with automatic two-year extensions. (Id.) Under Section 8.1, however, Cott had the right to terminate the Agreement at any time upon sixty (60) days prior written notice. (Id.; Doc. 40 at 4.)*fn2

Under the terms of the Agreement, Citri-Lite granted Cott the exclusive right to use the Slim-Lite(r) brand identity and all associated intellectual property rights, as defined by the Agreement, for purposes of the manufacture, production, distribution, sale and marketing of Slim-Lite. (Doc. 17 at 6.) In exchange, Cott agreed to make royalty payments to Citri-Lite based on a rate of fifty cents ($0.50) per case of product sold (i.e., fifty cents per 240 ounces of the product sold by Cott), with a guaranteed minimum royalty of $350,000 per year. (Id.; Doc. 40 at 4.)*fn3

The Agreement also contained a clause which required Cott to spend a certain amount to market Slim-Lite and to "otherwise use commercially reasonable efforts to promote and sell" Slim-Lite "so as to maintain and enhance the value of the goodwill" inhering in Slim-Lite(r) and "produce the maximum amount of" royalty under the Agreement:

2.4. Licensee's Effort To Sell. During the Term, the (12) month period during the Royalty Term the sum of Licensee will spend on average over each rolling twelve Eight Cents ($.80) per Case of Product sold by Licensee during such rolling twelve (12) month period to market the Products. Licensee shall otherwise use commercially reasonable efforts to promote and sell the Products to maintain and enhance the value of the goodwill so as residing in the Intellectual Property and to produce the maximum amount of with the quality control provisions of this Article 2.

Royalty under this Agreement consistent (Doc. 38, Ex. 3 at 4) (emphasis added.) The "Royalty Term" is defined in the Agreement as "any one-year period during which this Agreement is in effect commencing on the Effective Date [December 28, 2003] or an anniversary of the Effective Date." (Id. at 2.) The term "Case" is defined as the "quantity of twelve (12) containers of the product, where each container holds twenty (20) ounces or any configuration of containers." (Id. at 2.) The term "Products" means the "the non-carbonated, zero calorie soft drink marketed and sold by Licensor under the name SLIM-LITE(r) and/or that contains Citrimax and/or ChromMate." (Id.) The term "commercially reasonable efforts" is not defined in the Agreement and the Agreement did not identify specific marketing efforts which were required of Cott. (Doc. 40 at 6.)

The Agreement gave Cott an option to purchase the exclusive distribution and marketing rights, including numerous intellectual property rights, associated with Slim-Lite for a price of one million dollars ($1,000,000) with certain continued payments to Citri-Lite -- "forty (40) cents per Case of Products sold" - for a period of ten years. (Doc. 17 at 7.)

C. Cott's Selling And Promoting Of Slim-Lite

1. Overview

When Cott entered into the Agreement with Citri-Lite, 248 Sam's Club stores (or clubs) carried Slim-Lite. (Doc. 40 at 13.) In 2004, during the first year of the Agreement, the sales volume of Slim-Lite increased and more Sam's Clubs began carrying Slim-Lite than ever before. (Doc. 40 at 13, 17, 45-46.) Despite what appeared to be a successful first year, by May 2005 Cott began considering an "exit strategy" for Slim-Lite. (Doc. 45, Ex. 143; Doc. 42 at 29). By October 2005, less than two years into the Agreement, Cott informed Citri-Lite that it wanted to terminate the Agreement. (Doc. 40 at 52-53). According to Citri-Lite, before the Agreement ended, Cott mishandled the marketing of Slim-Lite in at least three ways, breaching its commitment to use "commercially reasonable efforts" to promote and sell the product.

First, in 2004, after Cott took over Slim-Lite, it continued Citri-Lite's practice of conducting in-store demos of Slim-Lite at Sam's Club. In 2005, however, Cott reduced and then stopped all of its demo activity at Sam's Club. According to Citri-Lite, this slow down and termination of demo activity negatively impacted SlimLite's success at Sam's Club.

Second, toward the end of 2004, Cott was developing a "repackaging strategy" for Slim-Lite as part of a major initiative aimed at solidifying long term distribution of Slim-Lite in Sam's Club and Walmart. Cott, however, failed to actually implement the repackaging change despite recognizing its importance to Slim-Lite's success and despite Sam's Club's request that it be done.

Third, while focusing its energy on Sam's Club and Walmart, Cott neglected other retailers, including Food Lion, another merchandiser of Slim-Lite. According to Citri-Lite, Cott did not develop any particular marketing plan for Food Lion and did not engage in sufficient promotional activity at Food Lion.

2. Efforts At Sam's Club

a. The Buyers

During the time Cott marketed Slim-Lite at Sam's Club, it worked with two Sam' Club buyers: Jim Dragovich and Becky Fields. Both Dragovich and Fields had discretion to modify the distribution of beverages under their respective categories, and both had the discretion to cancel beverages in their categories. (Doc. 40 at 9-10, 12.)

b. Demos And Packaging Changes

In 2004, Cott promoted Slim-Lite at Sam's Club through in-store demos. (Doc. 40 at 37.) Sam's Club used its own employees to run the in-store demos and charged the vendor (Cott) approximately $150 per demo in each store. (Id. at 13.) Sam's Club also charged the full retail price for the products used in demos, thus requiring the vendor to purchase their own sampled products. (Id.) Demos of Slim-Lite initially led to an approximate 20% increase in sales during demo weeks. (Id.) Cott spent over $800,000 for Slim-Lite demos at Sam's Clubs in 2004. (Id.)

Apart from promoting the product through in-store demos at Sam's Club, by September 2004, Cott employees developed a plan to change the packaging of Slim-Lite to a 24-pack containing 16.9 ounce bottles with registered shrink wrap. (Id. at 24, 27.) At the time, Cott was selling Slim-Lite to Sam's Club in a 12-pack containing 20 ounce bottles with transparent clear shrink wrap. (Schiederer Dep. 59:24-60:3; Doc. 36 at 7.) Cott was "seeing a movement toward 16.9oz as the preferred serve size from several competitors -- a trend for the category as a whole." (Doc. 47, Ex. 17.)

Sam's Club regularly worked with suppliers, like Cott, to determine what kind of packaging to use for their products and, according to Dragovich, the idea for Slim-Lite's packaging change originated from Sam's Club. (Dragovich Dep. 42:17-20, 79:19-22.)

A 16.9 ounce bottle was a "focus" for Sam's Club as they were "trying to line up 16.9 ounce [bottles] [for] all our beverages." (Dragovich Dep. 76:4-8; 79:19-22.) Further, according to Dragovich, "tuxedo wrap, the four-color, high graphic wrap was something we were asking our suppliers to look at as well because it promoted their product much better and where we made those changes, we saw increases in sales." (Dragovich Dep. 76:9-13.) Dragovich believed that Cott's packaging change would improve Slim-Lite's marketability at Sam's Club. (Dragovich Dep. 141:10-142:8.) Cott hoped to introduce the packaging change by January or February 2005. (Doc. 40 at 27.)

While the packaging plans were underway, in November 2004, Cott submitted to Sam's Club a 2005 demo plan for Slim-Lite. (Doc. 42 at 16.) This plan reduced in-store demos to only one demo per month per store in 2005. (Doc. 42 at 16.)*fn4 Shortly thereafter, on December 07, 2004, Gilbert Woods, Cott's Senior Manager for Sales and Finance, sent an internal e-mail to Jason Nichol of Cott. In the e-mail, Woods indicated that he wanted to cancel altogether in-club demos for Slim-Lite. (Doc. 45, Ex. 64.)

On January 3, 2005, Charles Calise, Cott's Marketing Manager, e-mailed George Horrigan, Citri-Lite's president, regarding Cott's new packaging plan and other details of Cott's "major initiative at solidifying long term distribution of Slim-Lite in SAMS Club Walmart." Calise's e-mail states:

Happy New Year George,

We appreciate your Lite. We continue to evaluate the feasibility of this and perspective on the 1L option for Slim-other opportunities success of the Slim-Lite brand. that will help ensure the long term

As you know aimed at solidifying we are in the midst of a major initiative in SAMS Club and Walmart. This initiative involves: long term distribution of Slim-Lite

* compliance refreshing labels and trays for legal and regulatory

* launching a 16.9oz line extension to better align

* transitioning with category trends business from the 20oz format to the 16.9oz format

* executing a packaging re-design to help improve

* managing pricing pallet merchandising, billboard and consumer appeal

* increasing promotional/demo activity[*fn5 ]

We agree with beyond Walmart and SAMS Club. As such, we continue to you that Slim-Lite needs distribution pursue distribution for Slim-Lite around the country through both our Alternative Channels continue to represent the pinnacle Retailer Specific teams. However, . . . Walmart and SAMS team and our recognition and to be a national player. We this in mind, we feel it is sales velocity for any brand that aspires for awareness, critical that we remain focused, continue current initiatives and concentrate on activities that to pursue our will help and SAMS. Once ensure the success of Slim-Lite within Walmart with these two key customers, we can then turn our we are confident that the brand is secure attention toward additional line extensions, etc. (Doc. 38, Ex. 32.)*fn6

Later that same month (January 2005), Cott's management did not approve of the anticipated packaging change.

In particular, Woods rejected the packaging change purportedly "based on less than acceptable gross margins at [the] suggested list price to Sam's." (Doc. 38 at 93.) Woods stated that he would reconsider the packaging change if: (1) Cott could obtain a higher price for Slim-Lite; (2) manufacturing costs could be lowered; (3) freight costs could be reduced by finding a repackaging location closer to Cott production facilities; and (4) Cott could obtain a reduction in the required demo spending. (Doc. 40 at 30-31.) Approximately a week later, Woods received revised information on manufacturing costs which were lower. If combined with a reduction in demo spending to $0.55 per 24-pack case, Woods indicated that the resulting increase in gross margin would enable him to reconsider the proposed packaging change for final approval. (Id. at 31.)

By February 2005, Citri-Lite and Cott were discussing amending the Agreement. (Doc. 45, Ex. 189.) Cott prepared a draft amendment, which memorialized the concessions Cott wanted. (Doc. 45, Ex. 94; Doc. 42 at 22.) Cott obtained Horrigan's verbal approval to the substance of the amendment, but apparently Cott failed to follow through and the written amendment was never executed. (Doc. 42 at 17, 22; Horrigan Decl. ¶ 35.)

c. The Decline Of Slim-Lite At Sam's Club

When Cott entered into the Agreement with Citri-Lite, 248 Sam's Club stores (or clubs) carried Slim-Lite. (Doc. 40 at 13.) In December 2004, Slim-Lite's distribution at Sam's Club reached a high of 528 clubs. (Id.) Between December 2004 and March 2005, however, with the demos reduced (as of 2005) and the packaging change still unrealized, Slim-Lite's distribution at Sam's Club declined from 528 clubs to 463 clubs. (Id. at 46.) In March 24, 2005, Cott, via e-mail, notified Sam's Clubs that it was canceling all remaining Slim-Lite demos (Id. at 24.)*fn7 Around the beginning of April 2005, Sam's Club cut the distribution of Slim-Lite even further from 463 stores to 89 stores. (Id. at 46.) The last demos at Sam's Club were conducted on or about the end of April 2005. (Id. at 22, 24.)

As the distribution decreased, Cott scheduled a "Leadership Team meeting" for April 12, 2005, to "decide upon the future of SlimLite." (Doc. 45, Ex. 99.) Cott's Vice President of Finance, Conall Dunne, questioned whether Cott "really want[ed] to pursue this 'licensed' brand" and whether Cott could produce Slim-Lite efficiently. (Id.) By May 23, 2005, Cott considered an "exit strategy" for Slim-Lite. An internal e-mail dated May 23, 2005, from Doreen Gormley, Cott's Vice President of Marketing, to several Cott employees, reads:

Team:

review our current situation

We agreed in our Product Review with SlimLite to develop an meeting that we would with Steve exit strategy Olinger, Matt, Jason & Rob Schiederer to for the brand. We had meetings/discussions comprehensive situational analysis to assist in discuss options/issues. Charles Calise then compiled a determining our next steps . . . .

Bottom line is that there is Jason to transition out of the brand, but we have a agreement by Steve O. and significant amount . . . We will need to be creative and of raws that must be depleted first . aggressive in effort with the Licensor (George the goods Horrigan) to discount hold onto our Sam's Club volume as long as feasible. and/or sell them elsewhere. We also want to finding the new supplier but it will require a collaborative ways to sell these goods and/or transfer them to George Horrigan's expectation brand and aggressively pursuing new volume. Now that we is that we are building the have contact all George and advise him that we would like to the information, our recommendation is to now develop an exit strategy assistance in depleting the raws and/or working with a for the brand and solicit his (some assistance in negotiating rate if possible. a reduced full year royalty are obsolete so we would have to look new supplier to absorb some of the raw materials sell through quickly). We will also ask for solutions to for Matt's request to exit the agreement

Before we contact George and formally advise him of our I wanted everyone to [be] aware of this strategy in case and ask for his assistance, losing the Sam's volume quicker than anticipated and/or there are any issues/concerns. There is some risk of if raw materials. he does not agree to help ...


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