United Roasters, Inc. v. Colgate-Palmolive Company, State of North Carolina, Amicus Curiae. United Roasters, Inc. v. Colgate-Palmolive Company, State of North Carolina, Amicus Curiae

Citation: 649 F.2d 985Docket: 80-1139

Court: Court of Appeals for the Fourth Circuit; June 19, 1981; Federal Appellate Court

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United Roasters, Inc. and Colgate-Palmolive Company engaged in a legal dispute concerning a breach of contract, culminating in cross appeals following a jury's decision. The jury ruled that Colgate breached three contractual obligations, including an implied duty to act in good faith regarding its right to terminate the contract, resulting in damages awarded to United Roasters amounting to $789,000. However, the district court determined that this breach did not constitute an unfair or deceptive act under North Carolina General Statutes § 75-1.1, thus denying treble damages under § 75-16. The appellate court affirmed the lower court's judgment, despite recognizing misunderstandings in United Roasters' legal theory. 

The contract, executed in 1973, granted Colgate the rights to manufacture and distribute Bambeanos, a snack product developed by United Roasters, with an initial two-year test-marketing phase followed by a 25-year performance period. In February 1976, the test-marketing phase was indefinitely extended in exchange for Colgate's repayment of an $88,000 promissory note. During the test-marketing phase, Colgate could terminate the contract with a 30-day written notice. Colgate tested Bambeanos in specific markets but did not profit, despite capturing a larger market share than expected. The situation shifted after Colgate announced a merger with Riviana Foods, leading to internal discussions about terminating the contract. Subsequently, Colgate ceased production and advertising for Bambeanos, selling off its inventory by May 1976.

The Riviana merger received approval from the Federal Trade Commission and the relevant company boards and shareholders by June 1976. On July 19, Colgate informed United Roasters of its intent to terminate their contract, with formal written confirmation following on August 27. United Roasters sought the return of its assets and improvements as stipulated in the contract, but Colgate refused to reconvey unless additional conditions were met. Colgate also did not fulfill its obligation to pay the Cameron-Brown note. Consequently, United Roasters initiated a diversity action to recover damages, alleging that Colgate had wrongfully terminated the contract without timely notice, violating both the contract's express provisions and an implied duty of good faith. United Roasters sought both contractual and treble damages, citing unfair commercial practices under N.C.G.S. 75-1.1, and sought compensation for Colgate's failure to reconvey assets and pay the note.

After a trial, the jury found Colgate liable for wrongfully refusing to reconvey assets, awarding $130,000, and for breaching its agreement regarding the Cameron-Brown note, with stipulated damages of $88,000. The jury also determined that Colgate acted in bad faith when terminating the contract, awarding United Roasters a total of $571,000 after accounting for damages that could have been avoided. The district judge issued partial judgment based on the jury's findings but declined to award treble damages, reasoning that Colgate's breach did not constitute an unfair or deceptive practice under N.C.G.S. 75-1.1.

On appeal, the parties disputed whether a good faith limitation exists in North Carolina for exercising an unconditional right of contract termination. Colgate argued against such a limitation, while United Roasters claimed it existed and warranted treble damages due to Colgate's bad faith. The court noted that the existence of such a limitation is unclear in North Carolina law and suggested that the plaintiff's claim may have been conceptually flawed. The principle of good faith dealing has emerged as a fundamental tenet of contract law, recognized across many jurisdictions, including North Carolina, as supported by case law.

In de Treville, the court examined the good faith principle concerning the termination of a franchise agreement, where a franchisee had established a significant business and inventory for servicing Evinrude Motors. The manufacturer terminated the franchise and awarded it to a competitor without purchasing the franchisee’s inventory or equipment. The court ruled that the manufacturer's actions were subject to good faith limitations under South Carolina law. There is considerable debate surrounding the good faith principle's applicability to unconditional contract termination rights, with contrasting case law illustrating varying interpretations.

North Carolina case law, such as General Tire and City of Gastonia, has traditionally upheld the absolute right to terminate contracts without imposing a good faith requirement. In Dockery, the court affirmed that employment contracts could be terminated at will, without regard to cause. The current case did not necessitate an exploration of whether North Carolina would recognize good faith limitations in contract termination.

The jury found that Colgate acted in bad faith by delaying communication to United Roasters regarding its decision to terminate their contract; Colgate made its decision in early 2023 but did not inform United Roasters until mid-July. While there is some argument for applying good faith to unconditional termination rights, the court expressed skepticism about requiring prompt notification of termination decisions, citing that a tenant under a month-to-month lease is not obligated to inform the landlord of a decision to vacate until closer to the termination date, although the tenant must continue to pay rent until the lease officially ends.

Colgate's conduct was problematic not due to its decision to terminate the contract before the end of March, but rather because it failed to perform its contractual obligations in good faith until the termination was effective. Colgate was required to exert its best efforts to promote Bambeanos but instead ceased production, halted advertising, and sold its inventory, constituting a breach of contract. Under North Carolina law, parties must perform their contractual duties in good faith, and Colgate's actions resulted in damages to United Roasters.

The principle of good faith is crucial in cases like de Treville, where significant economic losses may arise from a manufacturer's termination of a franchise. However, since United Roasters’ economic losses were compensable under traditional contract principles, the application of the good faith principle was unnecessary in this context.

Although the case was not presented to the jury solely on a breach of contract theory, the court could affirm based on that premise. United Roasters alleged bad faith in Count 1 and nonperformance in Count 3 but was required to choose one theory during trial. The plaintiff was wrongfully compelled to make this election, as the Federal Rules of Civil Procedure allow for alternative or inconsistent claims, and both counts were based on the same factual basis. The plaintiff was entitled to have both theories presented to the jury, and since they were forced to abandon one erroneously, the failure to include it in jury instructions should not be disregarded.

Direct evidence of Colgate's nonperformance was presented as circumstantial evidence by United Roasters to support its bad faith termination claim, although this legal theory was deemed misguided. Colgate had ample opportunity and incentive to present counter-evidence. The jury's findings confirmed the facts supporting the legal conclusion of nonperformance, allowing the appellate court to affirm the district court's judgment on grounds not previously considered at trial, negating the need for a remand. The district court correctly denied treble damages under Section 75-1.1, which prohibits unfair competition and deceptive practices in commerce, as prior interpretations by the North Carolina Supreme Court suggested this statute primarily addressed the sale of goods. However, the court later expanded the definition of "commerce" to include contracts like those between mortgage brokers and borrowers. The recent case Marshall v. Miller emphasized the statute's protective aim for consumers but did not invalidate previous interpretations. The court's stance that Colgate had not acted with intent to deceive was challenged by Marshall, which indicated that even innocent misrepresentations could lead to treble damages if they resulted in harm to the victims. Therefore, while the context of this case differs from that of mobile home transactions, Marshall implies that Colgate's lack of intent to deceive may not exempt it from liability under the statute.

Key points to determine include whether Colgate's actions were deemed unfair or deceptive under North Carolina statute 75-1.1. The statute covers misrepresentation and questionable marketing practices, requiring more than just a breach of contract for a claim of unfairness. While breaches inherently involve denial of contractual benefits, the statute's intention is to address substantial aggravating circumstances for treble damages. The North Carolina Supreme Court has identified practices that are deceptive or approach deception, particularly at the time of contract formation.

In this case, the jury found Colgate's breach intentional, but there was no evidence of unfairness or deception during contract formulation or at the time of breach. The contract was negotiated by sophisticated parties, with no indication of unfairness prior to Colgate's breach. 

The jury awarded $571,000 based on an expert's valuation of the Bambeanos business, which had potential for future profits despite initial losses. The court noted that the plaintiff was deprived of the opportunity to develop or sell the business due to Colgate's actions, and the damage calculations were adequately supported by expert testimony.

Colgate also claimed that a $130,000 award for failure to return equipment was duplicative of termination damages, but the court found no evidence of duplication and affirmed the jury's verdict. The decision was upheld without errors identified in the proceedings or the jury's interpretations of the evidence.