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LL Liquor, Inc. v. State

United States Court of Appeals, Ninth Circuit

December 28, 2018

LL Liquor, Inc., DBA Lolo Liquor, Plaintiff-Appellant,
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.

          Argued and Submitted May 15, 2018

          Appeal from the United States District Court for the District of Montana Sam E. Haddon, Senior District Judge, Presiding No. 6:15-cv-00071-SEH

          Jesse C. Kodadek (argued) and Ronald A. Bender, Worden Thane P.C., Missoula, Montana, for Plaintiff-Appellant.

          Christopher Thayne Sweeney (argued) and W. Anderson Forsythe, Moulton Bellingham PC, Billings, Montana, for Defendants-Appellees.

          Before: Marsha S. Berzon, Stephanie Dawn Thacker, [*] and Andrew D. Hurwitz, Circuit Judges.


         Civil Rights

         The panel affirmed the district court's summary judgment in favor of the State of Montana with respect to LL Liquor's claim that that Montana's Senate Bill 193, which restructured the formula for calculating the rate at which state-approved agency franchise stores could purchase liquor from the state, impaired LL Liquor's contract to purchase liquor with the Montana Department of Revenue, in violation of the Contracts Clause.

         The panel held Montana did not impair its contractual obligation to LL Liquor within the meaning of the Contracts Clause because it did not eliminate LL Liquor's remedy for breach of its contract with the state. The panel addressed LL Liquor's breach-of-contract claim in a memorandum disposition filed concurrently with the panel's opinion.



         The sale of liquor in Montana is heavily regulated. Montana maintains a monopoly on the distribution of liquor within the state through the Montana Department of Revenue (DOR). See Duane C. Kohoutek, Inc. v. State Dep't of Revenue, 417 P.3d 1105, 1107-08 (Mont. 2018). The DOR controls the supply of liquor and provides liquor to state-approved "agency franchise stores," which are privately owned. See id. With narrow exceptions, agency franchise stores must purchase their liquor directly from the DOR. See Mont. Code Ann. § 16-2-101 (2017). The stores may then sell the liquor either wholesale, to bars and restaurants, or retail, to individual consumers. LL Liquor, Inc., which does business as "Lolo Liquor," is one of ninety-six liquor stores in the state.

         Until 2016, the DOR did not use a uniform pricing scheme for agency franchise stores. Instead, the price of liquor varied based on discount rates set forth in each store's "agency franchise agreement," a contract between the DOR and the individual store. A higher discount rate meant cheaper liquor. These discount rates-known as "commission rates"-were negotiated between the DOR and each store.

         Two years into the term of Lolo Liquor's contract, Montana changed the rules, applying a uniform commission structure to all franchise stores in the state. The principal question before us is whether this change gives rise to a Contracts Clause claim by Lolo Liquor against the state. We conclude that it does not.[1]



         In March 2013, Lolo Liquor entered into a ten-year franchise agreement with the DOR to operate an agency franchise store based in Lolo, Montana, a town about ten miles outside Missoula. Three sections of that agreement are particularly relevant here.

         Section 2, titled "Agency Franchise Agreement," provided that the "Agreement must be renewed every ten years if the requirements of [the] Agreement have been satisfactorily performed," with the caveat that "[s]ubsequent changes to the law by the legislature may require terms to change in future renewals." This provision referenced section 16-2-101(5)(a) of the Montana Code, which, at the time the agreement was made, stated that an agency franchise agreement "must be renewed at the existing commission rate for additional 10-year periods." Mont. Code Ann. § 16-2-101(5)(a) (2013). Section 2 also stated that, "[d]uring the term of [the] Agreement, the commission . . . rate may be reviewed every three years, as provided by law." This clause included a reference to section 16-2-101(6) of the Montana Code, which at that time provided that the commission rate "may be reviewed every 3 years at the request of either party" but that the rate would only be adjusted "[i]f the [the franchise store] concurs." Id. § 16-2-101(6).

         Section 5, titled "Agent's Discount Rates," set forth how the commission rate of 16.144% was calculated. That commission rate comprised three separate discount rates: the "commission percentage discount rate" (11.400%), the "weighted average discount percentage rate" (3.869%), and the "volume of sales discount rate" (0.875%). The commission percentage discount rate was the part of the commission rate subject to negotiation; the remaining two discount rates were set by statute. This section also noted that Lolo Liquor's commission rate "may be reviewed and adjusted in accordance with Montana law." Notably, the commission rate was the only financial term found in the agreement.

         Finally, section 11, titled "Modification, Merger, and Definitions," provided that "[t]he parties agree that the [DOR] may amend or modify [the] Agreement to conform to changes in state or federal laws." Additionally, Section 11 included a merger clause, which stated that the agreement would "not be enlarged, modified or altered except in writing signed by all parties," with one important caveat-"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." Section 11 also required that the parties "make reasonable ...

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