Carlson Distributing v. Salt Lake Brewing

Citations: 2004 UT App 227; 95 P.3d 1171; 203 Utah Adv. Rep. 8; 2004 Utah App. LEXIS 68; 2004 WL 1469285Docket: 20030017-CA

Court: Court of Appeals of Utah; July 1, 2004; Utah; State Appellate Court

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Carlson Distributing Company and Salt Lake Brewing Co. L.C. are involved in a legal dispute stemming from the termination of their beer distribution agreement, originally executed on December 15, 1994. This agreement allowed Carlson to distribute the Squatters brand of beer and included an automatic annual renewal clause unless either party provided written notice at least ninety days prior to termination. Should Salt Lake Brewing choose not to renew, it was required to pay Carlson a termination fee calculated as 0.75 times Carlson's gross profits from the previous twelve months, payable within thirty days after settling all obligations.

On July 28, 2000, Salt Lake Brewing notified Carlson of the termination, effective July 31, 2000. In response, Carlson filed a lawsuit claiming breach of contract for premature termination and for raising beer prices, seeking lost profits for the remaining five months of the agreement and the termination fee. Carlson later amended the complaint to include a violation of the Utah Beer Industry Distribution Act.

Salt Lake Brewing counterclaimed, asserting that it was justified in terminating the agreement due to Carlson's failure to exert 'best efforts' in distribution. Additionally, Salt Lake Brewing contended that the termination fee should be lower than Carlson claimed and that Carlson owed outstanding invoices, which it argued needed to be settled before any termination fee was paid.

On June 25, 2001, the parties reached a stipulation in which Salt Lake Brewing admitted to breaching the agreement and acknowledged Carlson's entitlement to a termination fee. However, Salt Lake Brewing maintained that the exact judgment amount could not be determined until further discovery. Prior to trial, Salt Lake Brewing attempted to exclude testimony from Carlson's president regarding lost profits, arguing it only pertained to gross profits and not the net profits recoverable under Utah law, but the trial court denied this motion.

Carlson's motion to admit evidence related to the performance of M. M. Distributing Co., its successor, was denied by the trial court under Utah Rules of Civil Procedure 402 and 403, which determined the evidence was irrelevant to Carlson's 'best efforts' and its probative value was outweighed by potential confusion and delay. At trial's conclusion, Salt Lake Brewing successfully moved for a directed verdict on Carlson's claim regarding a violation of the Beer Act, as the distribution agreement was signed before the Act's enactment. The court also ruled in favor of Salt Lake Brewing on Carlson's lost profits claim, citing insufficient evidence of lost net profits. The jury awarded Carlson $294,022.56 as a termination fee but found no breach regarding price increases, while determining Carlson breached the distribution agreement by failing to use best efforts, resulting in damages to Salt Lake Brewing of $20,990.76. Post-trial, the court released $12,992.74 deposited by Carlson to Salt Lake Brewing and denied both parties' motions for attorney fees, deeming neither a prevailing party. The court granted Carlson partial prejudgment interest, awarding $49,842.12 at a 10% rate from February 24, 2001, based on a calculated amount of $290,617.64, which differed from the jury's award due to prior admissions by Salt Lake Brewing. Both parties appealed, with Carlson contesting the directed verdict on lost profits and the exclusion of evidence regarding the successor distributor's effectiveness, noting that the trial court has broad discretion in such matters.

Both parties contest the trial court's calculation of prejudgment interest. Carlson claims the court awarded interest on an amount different from the jury's determination, while Salt Lake Brewing cross-appeals, arguing that prejudgment interest should not have been awarded to Carlson at all. The review of a trial court's decision on prejudgment interest is a legal question assessed for correctness.

Additionally, both parties assert that the trial court abused its discretion by denying an award for attorney fees and costs. Carlson contends it was the prevailing party entitled to fees per the distribution agreement, whereas Salt Lake Brewing claims it was entitled to statutory fees due to Carlson's unsuccessful claim under the Beer Act. Determining the prevailing party is a matter of the trial court's discretion, reviewed for abuse.

Carlson also argues the trial court erred by granting a directed verdict to Salt Lake Brewing regarding lost profits. Carlson maintained that its net profits equaled gross profits because operating costs did not change when it ceased distributing Squatters beer. However, the court found Carlson only presented evidence of gross profits, which is insufficient for a lost profits claim to proceed to the jury. A party can only recover lost net profits, necessitating a calculation that accounts for gross profits minus incurred expenses. Evidence of lost profits must be proven with reasonable certainty and not be speculative, although some uncertainty is acceptable.

During testimony, Carlson stated that all costs were fixed and did not decrease when distribution stopped, implying lost net profits would equal lost gross profits. However, under cross-examination, Carlson acknowledged several costs that would have been incurred had the contract continued, including advertising, commissions, and fuel costs. Despite being questioned about these expenses, Carlson either failed to quantify them or claimed they were non-existent due to the contract's termination.

Proof of lost profits requires demonstration of net profit, including costs incurred to generate that profit, as established in Sawyers. The significance of identified costs not arising from Salt Lake Brewing's breach is diminished since the analysis assumes the contract would have continued without the breach. Carlson's reliance on Distillers Distributing Corp. is misplaced; that case's ruling hinges on evidence of fixed operating expenses, necessitating the deduction of identifiable nonfixed expenses. Carlson failed to substantiate that all operating expenses were fixed and did not quantify or deduct sales commissions and other trial costs. A directed verdict is appropriate when no competent evidence supports a verdict for the non-moving party. Carlson acknowledged multiple incurred costs but provided no evidence for actual costs or lost net profit, rendering any lost profit verdict speculative. 

Regarding evidence of a new distributor's efforts, Carlson attempted to introduce evidence of a significant decline in sales for Squatters beer following the termination of their distribution agreement. This was intended to counter Salt Lake Brewing's counterclaim of Carlson's inadequate efforts. However, the trial court excluded this evidence as irrelevant to Carlson's distribution efforts and potentially confusing for the jury. Relevant evidence must influence the probability of a fact in the case, and the trial court's discretion in determining relevance is upheld unless abused. An erroneous ruling on relevance warrants reversal only if it is shown that, without the error, a more favorable outcome was likely.

Both parties reference the case Bloor v. Falstaff Brewing Corp. to support their positions regarding the interpretation of the 'best efforts' standard, with Carlson advocating for an objective standard based on the actions of a comparable distributor and Salt Lake Brewing favoring a subjective interpretation. The trial court sided with Salt Lake Brewing, determining that 'best efforts' reflects a subjective standard, focused on Carlson's individual capabilities. It found that M. M.'s sales activities occurred under different conditions than Carlson's, making M. M.'s performance irrelevant to assessing Carlson's efforts. The court's conclusion that the 'best efforts' standard is subjective, hinging on Carlson's specific circumstances, was upheld, as M. M.'s performance did not provide a meaningful comparison. Consequently, the trial court acted within its discretion in excluding M. M.'s performance evidence. Additionally, both parties contested the trial court's ruling on prejudgment interest related to the termination fee awarded to Carlson. It was determined that while prejudgment interest was appropriate, it should be calculated based on the jury's determined amount, not the amount Salt Lake Brewing admitted in its pleadings.

Prejudgment interest is awarded to compensate a party for the diminishing value of owed amounts and to discourage withholding liquidated debts. In the case involving Salt Lake Brewing, the court determined that the termination fee owed to Carlson was not due until thirty days after Carlson settled all outstanding invoices. Salt Lake Brewing argued that Carlson's court deposit of nearly $13,000 did not trigger the fee procedures. However, the trial court found that Carlson's deposit on January 25, 2001, fulfilled the delivery obligation, which Salt Lake Brewing did not contest until July 2002. The court ruled this inaction constituted a waiver, triggering the termination fee due in February 2001.

The court determined that prejudgment interest should be calculated on the amount awarded by the jury, which was $294,022.56, rather than the lesser amount Salt Lake Brewing acknowledged in its counterclaim. Consequently, while affirming the award of prejudgment interest, the court reversed and remanded for recalculation based on the jury's figure.

Regarding attorney fees and costs, both parties appealed the trial court's ruling that neither was the prevailing party. The court affirmed this decision, emphasizing that the determination of the prevailing party is within the trial court's discretion and should consider various factors, including contractual language and the significance of claims. The trial court concluded that neither party had prevailed and denied fees under the Beer Act, which could not be applied retroactively in this instance.

The trial court focused on the second and third R.T. Nielson Co. factors—total claims and their interrelation—concluding that Carlson only succeeded on the termination fee claim, netting $273,000, while Salt Lake Brewing won all other claims, including a counterclaim for breach of contract. The court found that Carlson's success on the termination fee was insufficient to label him the prevailing party, as he lost on significant claims in the broader context of the lawsuit. Both parties were deemed to have reasonably incurred $115,000 in attorney fees. The court's discretion was upheld, acknowledging scenarios where neither party prevails, as recognized by R.T. Nielson Co. The court also affirmed that Salt Lake Brewing was not entitled to fees under the Beer Act, reasoning that the claim was part of the overall action. Salt Lake Brewing's defense of the Beer Act claim was considered in the overall assessment, leading to the conclusion that neither party emerged as the prevailing party. The fee provisions in both the parties' agreement and the Beer Act are contingent on prevailing in the entire action, not merely individual claims. Ultimately, the trial court's determination that no party was entitled to fees or costs was upheld.

The trial court's decisions regarding Carlson's claims have been largely upheld, including the directed verdict on Carlson’s lost profits claim, the exclusion of evidence about the successor's postbreach performance, the awarding of prejudgment interest on the termination fee, and the denial of attorney fees to either party. However, the court found error in not awarding prejudgment interest on the full jury-determined termination award, remanding that specific issue for further proceedings. 

Carlson's claim of trademark infringement was not pursued on appeal, nor was the request for injunctive relief to reinstate the distribution agreement for its remaining term. Challenges to the Beer Act claim were also withdrawn, leaving those issues unaddressed. Carlson’s argument regarding commission bonuses paid to employees in 2000 was deemed inadequate to support its claim for fixed commission expenses, as it conflicted with the obligation to mitigate damages from Salt Lake Brewing's breach. The court noted Carlson's failure to provide adequate financial evidence to substantiate the claim for net profits, highlighting the lack of detailed financial summaries or overhead expense breakdowns. 

Lastly, attorney fees can only be awarded in Utah if stipulated by statute or contract, and the distribution agreement allows the prevailing party to recover reasonable attorney fees and court costs.

An appellate court can uphold a trial court's judgment based on any legal ground apparent in the record, even if that ground differs from what the trial court stated or was not raised on appeal. This is supported by the case Bailey v. Bayles. The trial court's ruling that the Beer Act's attorney fees provision could not be applied retroactively is questioned by a recent Utah Supreme Court decision in State v. One Lot of Personal Property, which allowed fees in a forfeiture case initiated before the statute's enactment but incurred after it took effect. Additionally, Carlson's request for attorney fees and costs on appeal, based on their distribution agreement, is denied since the appellate court affirms that neither party prevailed in the lower action.