Ll Liquor, Inc. v. State of Montana

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS DEC 28 2018 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

LL LIQUOR, INC., DBA Lolo Liquor, No. 17-35405

Plaintiff-Appellant, D.C. No. 6:15-cv-00071-SEH

v. MEMORANDUM* STATE OF MONTANA; STEVE BULLOCK, in his official capacity as the Governor of Montana; MONTANA DEPARTMENT OF REVENUE; MIKE KADAS, in his official capacity as the Director of the Montana Department of Revenue; JOHN DOES, 1 through 10,

Defendants-Appellees.

Appeal from the United States District Court for the District of Montana Sam E. Haddon, District Judge, Presiding

Argued and Submitted May 15, 2018 Seattle, Washington

Before: BERZON, THACKER,** and HURWITZ, Circuit Judges.

LL Liquor, Inc., which does business as “Lolo Liquor,” appeals the district

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Stephanie Dawn Thacker, United States Circuit Judge for the U.S. Court of Appeals for the Fourth Circuit, sitting by designation. court’s grant of summary judgment to the state of Montana for breach of contract

under state law. As a state-approved “agency franchise store,” Lolo Liquor must

purchase its liquor from the Montana Department of Revenue (DOR). Until 2016,

the price of liquor was determined by the “agency franchise agreement,” a contract

negotiated between the DOR and the individual store. In 2016, two years into the

term of Lolo Liquor’s agreement, Montana passed Senate Bill (SB) 193, which

applied a uniform pricing scheme to all stores, thereby overriding the price

negotiated by Lolo Liquor. The district court concluded that Montana’s passage of

SB 193 did not breach the agreement and granted summary judgment to Montana

on Lolo Liquor’s breach-of-contract claim. We reverse.1

1. The district court concluded that the agency franchise agreement was

“unambiguous” and did not contain a promise that the commission rate would be

changed “only with the consent of the franchisee during the ten-year term of the

contract.” We disagree. The contract did contain such a promise.

Section 2 of the agreement, which specified that the commission rate set

forth in section 5 “may be reviewed every three years, as provided by law,”

provided a specific mechanism for modifications of the commission rate during the

1 Lolo Liquor also appeals the district court’s grant of summary judgment on its claim under the Contracts Clause of the U.S. Constitution. We affirm on that claim in a concurrently filed opinion.

2 term of the agreement. This language included a citation to section 16-2-101(6) of

the Montana Code, which in 2013 stated that a commission rate “may be reviewed

every 3 years at the request of either party” but also provided that the rate would

change only with the franchise store’s consent. Mont. Code Ann. § 16-2-101(6)(a)

(2013).2

Another part of section 2 noted that, “for future renewals,” the agreement

could be modified based on “[s]ubsequent changes to the law” (emphasis added).

The negative implication of this language, which appears in the same section as the

specific allusion to protection of the commission rate, is that changes in law as to

the key financial provision of the agreement were permissible with regard to future

agreements but not the current one.

Considered together, the most reasonable interpretation of these provisions

is that, contrary to the district court’s conclusion, section 2 did contain a promise:

During the term of the agreement, the commission rate could be adjusted every

three years, but only with the consent of the franchise store. Without the franchise

store’s consent, changes to the commission rate could take effect, if at all, only for

future renewals.

2 Although SB 193 amended this provision, under Montana law, “laws existing at the time a contract is formed become part of the contract” where, as here, the statutory provision is an “integral component” of the contract. Earls v. Chase Bank of Tex., N.A., 59 P.3d 364, 366 (Mont. 2002).

3 2. The specific promise in section 2 concerning the stability of the

commission rate during the term of the agreement was not overridden by section

11 of the agreement. Section 11 provided that “the [DOR] may amend or modify

this Agreement to conform to changes in state or federal laws” and that “any

change required by a change in Montana law shall be effective immediately upon

the effective date of such change in law, notwithstanding the failure of a party to

agree in writing to such change.”

Under Montana law, “a contract must be so interpreted as to give effect to

the mutual intention of the parties as it existed at the time of contracting.” Mont.

Code Ann. § 28-3-301 (2017). Here, the context of the parties’ negotiations

strongly suggests that the parties did not contemplate that the commission rate was

modifiable at will. Notably, the commission rate in section 5 was the only financial

term included in the entire agreement. As the record demonstrates, the term was

critical to Lolo Liquor’s business plan and to the success of Lolo Liquor’s

business. Given the central importance of that term and of section 2’s preservation

of the term, we doubt that, by agreeing to section 11, Lolo Liquor “unwittingly

welcomed a Trojan Horse containing within itself the seeds of destruction of its

own business.” Pure Wafer Inc. v. City of Prescott, 845 F.3d 943, 958 (9th Cir.

2017).

Moreover, the provision at issue in section 11 is extremely general, applying

4 to “any change required by a change in Montana law” (emphasis added). The

provision does not specifically address the commission rate or expressly authorize

unilateral changes to that rate. Section 2, by contrast, spelled out the specific

manner in which the commission rate could be modified, both during the term of

the agreement and for future renewals. It is “[a] standard rule of contract

interpretation . . . that when provisions are inconsistent, specific terms control over

general ones.” S. Cal. Gas Co. v. City of Santa Monica, 336 F.3d 891 (9th Cir.

2003); see also Mont. Code Ann. § 1-3-225 (2017) (“Particular expressions qualify

those which are general.”). The contrast in specificity between section 2, which

expressly discussed changes to the commission rate, and section 11, which did not,

cuts strongly against Montana’s interpretation of the agreement.

Finally, section 2 already provided specific mechanisms for adjusting the

commission rate, both during the term of the contract and for future renewals.

Montana’s interpretation of section 11 would bypass those established

mechanisms, allowing the state to adjust the commission rate at will through

legislation. If section 11 required all changes in Montana law to take effect

immediately, then the language in section 2 protecting against unilateral changes in

the commission rate would appear to be largely superfluous—any such changes

would take effect right away, not every three years with permission, and not for

future renewals without permission. Under Montana law, “[t]he whole of a contract

5 is to be taken together so as to give effect to every part if reasonably practicable,

each clause helping to interpret the other.” Mont. Code Ann. § 28-3-202 (2017).

The superfluities created by Montana’s sweeping interpretation of section 11 only

further undermine the state’s argument.

3. For the foregoing reasons, we conclude that, with respect to the

commission rate, the agency franchise agreement is susceptible to only one

reasonable interpretation—that Montana promised that Lolo Liquor’s commission

rate would not change during the term of the agreement without Lolo Liquor’s

consent. SB 193’s enactment broke that promise and thus breached the agreement.

On remand, the district court should determine the appropriate remedy for Lolo

Liquor under state law.3

REVERSED and REMANDED.

3 Because we conclude that Montana breached its agreement with Lolo Liquor, we do not reach Lolo Liquor’s alternative argument that the state breached the covenant of good faith and fair dealing.

6 FILED LL Liquor, Inc. v. State of Montana, 17-35405 DEC 28 2018

HURWITZ, Circuit Judge, dissenting: MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS

I agree with the majority that the ultimate issue for decision is whether,

applying Montana law, the district court correctly held that the MDOR did not

breach its contract with Lolo. But, I think the district court correctly found no breach

of contract, and therefore respectfully dissent.

Section 11 of the contract between MDOR and Lolo clearly provides that “the

Department may amend or modify this Agreement to conform to changes in state or

federal laws,” and that “any change required by a change in Montana law shall be

effective immediately upon the effective date of such change in law.” At the time

the contract was signed, Montana law allowed MDOR to negotiate commission rates

with distributors such as Lolo. Mont. Code Ann. § 16-2-101(4)(a)(i)(B) (2009).

But, in 2015, the Governor signed a bill specifying the commission rates applicable

to distributor contracts. Act of Apr. 29, 2015, Ch. 362 § 2, 2015 Mont. Laws 1581,

1582–83. In accordance with its plain language, the Lolo-MDOR agreement was

automatically modified by the new state law.

Notably, the majority does not contend that an agreement providing for

automatic modification upon the passage of a subsequent statute would be

unenforceable under Montana contract law. Nor does the majority suggest that the

2015 Montana statute did not, on its face, cover the Lolo-MDOR contract. See Mont. Code Ann. § 16-2-101(4) (2015) (providing for “each agency liquor store's

commission rate”) (emphasis added). Rather, the majority holds that Section 11

can’t really mean what it says. That conclusion rests heavily on the majority’s

perception that Section 2 of the contract, which provides that “[s]ubsequent changes

to the law by the legislature may require terms to change in future renewals of the

agreement,” is a “negative implication” that any changes in state law could not

impact the commissions during the contract’s current term. But, Section 2 deals with

renewals, not modifications during the term of the agreement; Section 11 deals

expressly with modifications during the contractual term, and plainly requires

modifications in accordance with state law. And, in any event, there is no conflict

between Sections 2 and 11. Read sensibly, Section 2 merely reinforces the point

made in Section 11—the contract, whether during the course of its original term or

after renewal, is always subject to changes in state law in this highly regulated area.

Nor does the final part of Section 2 suggest a different result. It simply

provides that “[d]uring the term of this Agreement, the commission percentage

discount rate may be reviewed every three years, as provided by law.” That language

simply allows the parties—in accordance with governing state law—to review the

commission rate periodically. It does not promise that the commission rate will not

change if a law so requiring is passed during the contract term; indeed, it emphasizes

that the contract can be changed by subsequent state law. Montana law requires that we enforce the contract as written. See Mary J.

Baker Revocable Tr. v. Cenex Harvest States, Coops., Inc., 164 P.3d 851, 857 (Mont.

2007) (“If the language of a contract is unambiguous—i.e., reasonably susceptible

to only one construction—the duty of the court is to apply the language as written.”).

Had a Montana statute increased commission rates during the ten-year term of the

agreement, Lolo would surely insist that it was entitled under Section 11 to the

benefit of that legislation. And, Lolo would be correct, because that is precisely

what it and the MDOR agreed to. The converse is also true. I would therefore affirm

the judgment of the district court. I respectfully dissent.