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The Citri-Lite Company, A California Corporation v. Cott Beverages

September 30, 2011


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



Plaintiff The Citri-Lite Company ("Citri-Lite"), represented by David J. Cooper and James M. Duncan from Klien, DeNatale, Goldner, Coop, Rosenlieb, LLP, proceeds with this action against Cott Beverages Inc., d.b.a. Cott Beverages U.S.A. ("Cott"), represented by David C. Scheper and Gregory A. Ellis from Scheper Kim & Harris, LLP, for breach of contract. CitriLite contends Cott breached both the express and implied terms of a license agreement by failing to promote the licensed products in a commercially reasonable manner. Cott denies the allegations.

An eight-day bench trial, which included the testimony of five live witnesses and several more via deposition testimony,*fn1 concluded with closing arguments on August 30, 2011. The case was then submitted for decision. Plaintiff and Defendant submitted proposed findings on August 24, 2011. ECF Nos. 148, 149.



1.Plaintiff Citri-Lite is a California corporation with its principal place of business in Grass Valley, California. Defendant Cott is a Georgia corporation with its principal place of business in Tampa, Florida. The parties are of diverse citizenship and the amount in controversy is in excess of $75,000.00 exclusive of interest and costs. Diversity jurisdiction exists under 28 U.S.C. § 1332.

B.The Parties.

2.Plaintiff Citri-Lite was incorporated in 1996 to produce and market "Slim-Lite," a non-carbonated, zero calorie, fruit flavored diet drink designed to help support weight loss. Statement Undisputed Facts ("SUF") No. 4.

3.Citri-Lite owns Federal Trademark Registrations in the Slim-Lite brand name. See Joint Ex. 1.

4.Citri-Lite operated a website having the domain name which was transferred to Cott. Joint Ex. 1.

5.George Horrigan is Citri-Lite‟s president and has worked in the beverage industry since the mid-1950s. He has experience marketing branded beverages since the 1960s and has worked with financial staff in setting goals and evaluating the effectiveness of marketing efforts.

6.Ed Flynn is Secretary/Treasurer of Citri-Lite and is co-owner with Mr. Horrigan.

7.Randy Reeser acted as a broker for Citri-Lite from 2000 through 2003, marketing Slim-Lite primarily to the warehouse club chain, Sam‟s Club.

8.Cott produces and distributes beverages, including carbonated soft drinks, sparkling and flavored waters, energy drinks, juices, juice drinks, ready-to-drink teas, and other noncarbonated beverages.

9.Jason Nichol was Cott‟s Vice President for customer and business development and oversaw Cott‟s business with Wal-Mart and Sam‟s Club during the period in which the License Agreement was in effect.

10.Rob Scheiderer was Cott‟s Director of Sales. Mr. Schiederer became Director of Marketing and Category Management in January 2005 until March 2006.

11.Charles Calise became a Marketing Manager at Cott in December 2003. He was responsible for control of branded beverages, including Slim-Lite.

12.Doug Covington was employed by Cott from May 2001 to fall, 2006. Mr. Covington was Cott‟s principal contact with Sam‟s Club buyer Jim Dragovich regarding the distribution of Slim-Lite until Becky Fields took over as buyer.

13.Richard De La Cruz was Cott‟s Director of Sales and Cott‟s representative responsible for the distribution of Slim-Lite to Wal-Mart.

14.Larry Thompson was the Cott representative responsible for the distribution of Slim-Lite to Food Lion. Mr. Thompson was Cott‟s principal contact with Mike McGlothlin, who was a food broker for a company named Crossmark regarding the distribution of Slim-Lite at Food Lion.

C.Initial Development and Distribution of Slim-Lite (1990s -- 2003).

15.Citri-Lite was originally formed to sell concentrate of Slim-Lite to bottlers, and started production in 1996-1997 with a 7-Up bottler in Wyoming. Trial Tr. 69:2-18, Jun. 30, 2011. This undertaking ultimately failed.

16.Citri-Lite then developed four flavors of a noncarbonated beverage, which was distributed through National Beverage Company. Trial Tr. 69:21-71:15, Jun. 30, 2011. Citri-Lite had no direct involvement with any of the marketing or promotional efforts implemented by National Beverage Company.

17. National Beverage Company sold the product to Costco and Sam‟s Club. In approximately 1999, this endeavor also failed and Slim-Lite was removed from stores. Trial Tr. 72:2-8, Jun. 30, 2011.

18. Citri-Lite brought on Mr. Reeser in late 1999 as an independent contractor to gain distribution of Slim-Lite at large retailers. Trial Tr. 74:9-75:24, Jun. 30, 2011.

19. Slim-Lite was tested at Wal-Mart stores in 2002, but was removed from the stores after less than six months. Trial Tr. 731:16-732:14, July 7, 2011.

20. Citri-Lite‟s Slim-Lite business operated at a loss between 1996 -- 2002 and made a profit in 2003. SUF No. 5; Joint Ex. 131.4.

a. In 2001, Citri-Lite operated at a loss of 10% of gross sales, or negative ($40,5658.02).

b. In 2002, Citri-Lite operated at a loss of 4% of gross sales, or negative ($84,084.28).

c. In 2003, Citri-Lite made a profit of 6% of gross sales, or plus $252,217.87.

21. In Slim-Lite‟s profitable year, Mr. Horrigan received a $3,000 per month salary. Mr. Reeser was paid total compensation of gross sales less marketing and freight. Joint Ex. 131. Mr. Flynn was paid no salary, but received a return of his capital contribution. Trial Tr. 119:1-10, July 1, 2011.

22. John Carson, Plaintiff‟s marketing expert, considered the growth from 8,000 cases in 2000 to almost 700,000 cases in 2003 "stellar." Tr. 857:25-858:2, July 8, 2011.

23. Citri-Lite‟s primary marketing approach for Slim-Lite at Sam‟s Club was the use of in-store demonstrations, known as "samplings" or "demos." See, e.g. , Trial Tr. 394:17-395:8, July 6, 2011. (Horrigan). When a product is "demo‟d" at Sam‟s Club, shoppers are offered a free sample of the product.

24. Plaintiff emphasizes that its sales volume reached 700,000 cases in 2003. The net profit on those sales for 2003 was not as much as the annual royalty of $350,000 per year which Cott was committed to pay whether or not Cott sold a single case of Slim-Lite case in a given year. Tr. 390:18-20, July 6, 2011 (Horrigan). This guaranteed royalty payment provided protection for Citri-Lite assuming arguendo "the product was ignored and sales [took] a major drop." Joint Ex. 146. Further, the .80ó per case marketing fee was also required to be paid by Cott on every case sold. Joint Ex. 1.

25. By the end of 2002, demos were conducted between two and four times per month. See, e.g. , Trial Tr. 115:16-18, July 1, 2011 (Horrigan); Joint Ex. 140.

26. Citri-Lite did not perform any market share analyses measuring the customer recognition or market share, customer loyalty or acceptance, and/or any economic appraisal of the value of the Slim-Lite brand before 2003. Trial Tr. 1332:25-1333: 21, 1334:21-1335:2, July 19, 2011 (Neches).

D.The License Agreement.

27. On September 17, 2003, Mr. Horrigan agreed to exclusively license Slim-Lite to Cott by assigning to Cott all manufacturing, production, distribution, sales, and marketing. The terms and conditions included: (1) a royalty rate of $.50 per case; (2) that Cott maintain the current level of marketing support Citri-Lite was providing; and (3) some method to protect Citri-Lite if "the product was ignored and sales took a major dip." Joint Ex. 1; Joint Ex. 146.

28. On December 28, 2003, the parties incorporated these terms into its written Intellectual Property License and Purchase Option Agreement (the "Agreement"). The Agreement‟s "effort to sell" clause states:

2.4 Licensee‟s Effort to Sell. During the Term, Licensee will spend on average over each rolling twelve (12) month period during the Royalty Term the sum of Eighty 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 so as to maintain and enhance the value of the goodwill residing in the Intellectual Property and to produce the maximum amount of Royalty under this Agreement consistent with the quality control provisions of this Article 2.

Joint Trial Ex. 1, at 4.

29. The Agreement defines "Case" as "the quantity of twelve (12) containers of the product, where each container holds twenty (20) ounces or any configuration of containers." Joint Trial Ex. 1, at 2.

30. "Intellectual Property" is defined as the trademarks for the Slim-Lite brand, the website used to market Slim-Lite, and the specific formulations, manufacturing, mixing and packaging instructions used to produce and package Slim-Lite. Joint Trial Ex. 1, at 2.

31. "Goodwill" is not defined in the Agreement, but Mr. Carson testified that the phrase "maintain and enhance the value of the goodwill of the brand" is commonly understood to mean "build the brand" and not harm the brand. Tr. 891:8-24, July 8, 2011. This must be balanced with a company‟s right to consider its own business interests. See, e.g. , Metavante Corp. v. Emigrant Sav. Bank , 619 F.3d 748 (7th Cir. 2010).

32. "Commercially reasonable efforts" is not defined. Defendant‟s expert, Randolph Bucklin, testified that marketing effort need not be successful in order to be commercially reasonable because all marketing actions involve risk. Tr. 1051:25-1052:13, July 12, 2011.

33. The Agreement does not contain a "best efforts" clause. Within the beverage industry, it is understood that a "best efforts" clause imposes a higher standard of performance than a "commercially reasonable efforts" clause.

34. Section 2.4 of the Agreement does not reference demos, nor does it set forth any specific marketing program or performance standards.

35. Mr. Horrigan was extremely experienced, knowledgeable and sophisticated in beverage marketing, yet despite assigning over the entirety of the marketing, sales, distribution and production of Slim-Lite to Cott, he did not ask to include definite performance standards, finite sales goals, defined reporting times, or a specific marketing plan.

36. The parties‟ negotiations solely focused on the monetary amount Citri-Lite had been spending on demos in coming to agreement on an overarching, generalized 80-cent-per-case marketing expenditure requirement for whatever strategies and efforts Cott would later employ. See Trial Tr. 394:17-395:8, July 6, 2011.

37. Mr. Horrigan agreed that "from a business perspective, [] taking [Mr. Horrigan‟s] business experience into account, this [Agreement] included all the business points that. . . were needed. " Trial Tr. 383:11-384:6, July 6, 2011 (Horrigan) (emphasis added). Mr. Horrigan further testified that the parties‟ Agreement was not similar to a franchising agreement in that no "unique marketing or unique advertising or packaging. . . would have to be protected and quality maintained subject to inspection." Trial Tr. 144:9-14, July 1, 2011 (Horrigan).

38. Section 3.1 of the Agreement required Cott to pay Citri-Lite a royalty in the amount of fifty cents per "Case" of Slim-Lite sold, as the term "Case" is defined in the Agreement. Section 3.1 further specified that the amount of royalty would be prorated if Slim-Lite were sold in packaging configurations totaling other than 240 ounces. Joint Trial Ex. 1, at 4.

39. Section 3.2 of the Agreement required Cott to pay Citri-Lite a minimum royalty of $350,000.00 for each year of the contract term. Joint Trial Ex. 1, at 5. Cott was relieved from the minimum royalty provision under the Agreement only if Sam‟s Club ceased to offer Slim-Lite as a permanent item during the first year of the Agreement. This did not eventuate and Cott was not relieved from the provision. Id.

40. The minimum annual royalty is more annual profit than Citri-Lite had previously made from Slim-Lite.

41. There is no requirement in the Agreement regarding the amount or content of Cott‟s communication with Citri-Lite.

42. Under Section 8.1, Cott and Citri-Lite each had the right to terminate the Agreement for any reason at any time upon sixty days prior written notice. Joint Ex. 1.

43. Following execution of the Agreement, Citri-Lite transferred the website to Cott. Trial Tr. 204:5-11, July 1, 2011; Cott took over all roles concerning Slim-Lite.

Trial Tr. 201:8-15, July 1, 2011.

E.Cott‟s Marketing Efforts Under the Agreement.

1) Overall.

44. When Cott entered into the Agreement with Citri-Lite, 248 Sam‟s Club stores carried Slim-Lite. In 2004, during the first year of the Agreement, distribution was increased and more Sam‟s Clubs began carrying Slim-Lite. By May 2005, however, distribution was cut dramatically without warning from Sam‟s Club and Cott began considering an "exit strategy" from Slim-Lite.

45. By October 2005, Cott first informed Citri-Lite that it intended to terminate the Agreement.

46. According to Citri-Lite, before the Agreement expired, 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.

47. 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 Slim-Lite‟s success at Sam‟s Club.

48. Second, toward the end of 2004, Cott was developing a "repackaging strategy" for Slim-Lite. In the end, however, the repackaging change was not implemented despite Sam‟s Club‟s request that it be accomplished.

49. Third, while focusing its energy on Sam‟s Club and Wal-Mart, Cott neglected other retailers, including Food Lion, another merchandiser of Slim-Lite. Citri-Lite contends Cott did not engage in sufficient promotional activity at Food Lion.

2) Efforts at Sam‟s Club (2004 -- 2005).

a. The Buyers.

50. During the time Cott marketed Slim-Lite, it worked with two Sam‟s Club buyers: Jim Dragovich and Becky Fields. SUF No. 14.

51. Mr. Dragovich and Ms. Fields had full discretion to modify the distribution of beverages under their respective categories. Both buyers also had discretion to cancel beverages in their categories. SUF No. 15, 16.

52. Sam‟s Club buyers are "notoriously difficult" to deal with in the beverage industry. Mr. Horrigan agreed that "the buyers at Sam‟s or Wal-Mart are powerful," and that they "can make you or break you." Trial Tr. 533:14-16, July 6, 2011.

b. Demos and Their Effectiveness.

(1)Demo Timeline.

53. Between approximately January and July 2004, Cott employed a consistent, twice-monthly demo program for Slim-Lite at Sam‟s Club, which was reduced to about once per month thereafter. See Trial Tr. 855:1-4, July 8, 2011.

54. Sales of Slim-Lite began to falter and considerably decline during and/or following April 2004, despite the consistent demoing. Def.‟s Ex. 420; Pl.‟s Ex. 236. According to Slim-Lite‟s spreadsheet, sales volume in April 2004 was 85,619 while the volume from May through December was approximately 12,000 to 35,000 less than April. Pl.‟s Ex. 236.

55. In November 2004, Cott provided Sam‟s Club with its planned demo schedule for Slim-Lite in 2005, which set out one demo per month. Joint Ex. 31. Mr. Dragovich did not question the schedule or request that any additional demos be conducted.

56. Cott ran two demos at all Sam‟s Clubs in January 2005. Trial Tr. 1079:19-24, July 12, 2011. During January 2005, Slim-Lite was carried at approximately 500 Sam‟s Clubs nationwide,*fn2 pursuant to which, Cott ran approximately 1,000 demos. Joint Ex. 20.

57. Cott contemplated ceasing demos at Sam‟s Club in or around February 2005, in part due to the impending buyer change from Mr. Dragovich to Ms. Fields. See Trial Tr. 1225:6-7, July 12, 2011 (Schiederer) ("Becky [Fields] doesn‟t like demos."). Cott, which paid from demos, also believed that Sam‟s Club was running more demos than were authorized. Trial Tr. 1210:10-1211:6, July 12, 2011 (Schiederer).

58. The idea to cancel was further motivated by declining sales and the demos‟ lackluster effect on sales in comparison to their cost. At that time Cott was implementing other marketing endeavors to support and/or replace demo marketing.

59. On or about March 24, 2005, Cott canceled all remaining demos at Sam‟s Club. Joint Ex. 87.

60. After Cott canceled all demos, Cott remained willing to run more demos as necessary to meet the 80 cent per case marketing requirement under the Agreement. Joint Ex. 124.

61. Plaintiff states that Mr. Dragovich believed Cott "backed down" on the demo commitment for Slim-Lite. Mr. Carson drew the inference that Cott‟s conduct sent a message to Mr. Dragovich and Mr. Dragovich responded by losing interest in Slim-Lite. Tr. 897:13-898:4, July 8, 2011. However, Mr. Dragovich testified it was "not possible" that he reduced the distribution from 560 to 90 stores because of the reduction of demos. Tr. 1479:4-24, July 19, 2011.

(2)Demo Effectiveness.

62. Throughout 2004, Cott spent in excess of the 80-cent per case marketing requirement by paying for demos at Sam‟s Club. See e.g. , Joint Ex. 47. Mr. Bucklin, Cott‟s marketing expert, determined that in 2004, Cott spent $1.05 per case of Slim-Lite sold via demos. Trial Tr. 1087:2-9, July 12, 2011.

63. Mr. Horrigan testified that "most demo programs don't pay for themselves. They pay for it over time." Trial Tr. 360:11-15, July 6, 2011.

64. Mr. Bucklin performed a regression analysis to examine the effects of demos upon sales at Sam‟s Clubs during the term of the Agreement, as well as the costs and benefits of demos in order to determine if demos were, in fact, paying for themselves over time. Trial Tr. 1044:13-15, 1054:24-1055:7, 1059:3-19, July 12, 2011.

65. Mr. Bucklin determined the demos did not.

66. His analysis reviewed all available point-of-sale records for Slim-Lite and all available schedules of demo activities of Slim-Lite during the term of the Agreement. Trial Tr. 1044:13-15, 1054:24-1055:7, 1059:3-19, July 12, 2011.

67. Mr. Bucklin evaluated demo activity at Sam‟s Club for three factors: (1) the increase in Slim-Lite sales at Sam‟s Club during weeks demos were performed; (2) a comparison between the cost of demos and the contribution margin -- i.e., the difference between the sale price of the additional cases sold and the variable costs of producing the additional cases -- resulting from the increase in sales during demo weeks; and (3) whether demos of Slim-Lite had any "carryover effect" on sales -- i.e., whether demos caused sales to increase in follow-up weeks when demos were not run. Id. at 1055:8-1057:1, 1070:5-9.

68. First, Mr. Bucklin determined that demos led to an increase in sales of approximately 12 cases during the week the demos took place as compared to weeks when demos did not occur. Id. at 1055:12-1056:5, 1060:24-1061:3.

69. Second, Mr. Bucklin concluded that Cott spent, on average, $143 per demo, including both the cost of the demo and the price of Slim-Lite cases purchased to sample at each demo.

Mr. Bucklin further concluded that Cott‟s contribution margin was 23 percent; based on a list price of $5.87, Cott‟s incremental gain on the 12 additional cases sold per demo was only $16.20.*fn3

Id. at 1056:23-1057:11, 1066:4-1068:3. The cost of a demo to Cott was eight to nine times the contribution margin realized from each demo. Id. at 1068:14-17.

70. Third, Mr. Bucklin acknowledged that despite their costs demos could be a useful marketing activity if they led to increased long-term sales of Slim-Lite, and analyzed the carryover effect of demos. After running analyses on sales both four weeks after a demo and eight weeks after a demo, Mr. Bucklin found that demos did not have any carryover effect on sales of Slim-Lite. Id. at 1056:10-22, 1068:18-1069:10. Demos of CitriLite did not increase sales in any weeks other than the demo weeks themselves. See Def.‟s Ex. 420 (Bucklin‟s graph of the effect of demos on sales showing a "sawtooth" pattern of sales increases in demo weeks, followed by sales drops in subsequent weeks.)

71. Mr. Bucklin also ran analyses to determine if demos had differing effects from January through August 2004, when Club distribution was constant, and September 2004 through April 2005, when Sam‟s Club distribution expanded; these analyses led to the same ...

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