Opinion
Case No. 3:13-cv-196
08-05-2014
Bobby Fisher, Inc., d.b.a. The Fisher Company, Plaintiff, v. Cerveceria Costa Rica, S.A., et al., Defendants.
ENTRY AND ORDER ESTABLISHING DIMINISHED VALUE OF PLAINTIFF'S DISTRIBUTORSHIP AT $435,211.47.
The parties have asked the Court, pursuant to the Ohio Revised Code, to establish the diminished value of Plaintiff's beer distributorship in light of Defendant's decision to terminate Plaintiff's right to distribute certain brands of beer. Plaintiff is Bobby Fisher Inc., who pursuant to Section 1333.851 of Ohio's Alcoholic Beverage Franchise Act, Ohio Revised Code §§ 1333.82 - 1333.87, is entitled to the diminished value of its business related to the loss of the right to distribute and sell certain beer brands, including Labatt Blue and Genesee, referred to as "the NAB Brands."
I. Background
In 1947, Bobby Fisher's father founded The Fisher Beverage Company. The Fisher Beverage Company distributed brands including Stroh's and Schlitz in the area around Springfield, Ohio.
In 1974, the Ohio Legislature passed the Ohio Alcoholic Beverages Franchise Act. Ohio Rev. Code § 1333.82-.87. The Act protected the rights of distributors of alcoholic beverages against manufacturers. According to one provision of the Act, when a successor manufacturer acquires another manufacturer through merger or acquisition, the successor manufacturer, within a limited time frame of the date of the acquisition, may terminate the franchise to a distributor of the acquired brand. Ohio Rev. Code § 1333.85(D). The Act also requires the successor manufacturer to compensate the distributor for the diminished value of the distributor's business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer. Id.
Two years after the passage of the Ohio Alcoholic Beverages Act, in 1976, Bobby Fisher founded The Bobby Fisher Company, purchasing several brands from his father. Doc. 36 at #298. Thus, The Bobby Fisher Company has always operated with the knowledge that a merger or acquisition might divest him of the rights to distribute any of the brands he purchased. This legislative backdrop diminishes the reasonableness of the emotional value Bobby Fisher would have the Court attach to brands he acquired from his father and hoped to pass on to his daughter. Most particularly, the Labatt brand acquired in 1984 and the Genesee brand in acquired in 1988, and all the brands at issue in this case, were acquired with the knowledge that a successor manufacturer could terminate his rights to distribute them without cause.
In a letter dated February 27, 2013, Cerveceria Costa Rica notified Bobby Fisher Inc. that Cerveceria Costa Rica was terminating Bobby Fisher Inc.'s franchise for the NAB Brands pursuant to R.C. §1333.85(D). Thus, Cerveceria Costa Rica has to compensate Bobby Fisher Inc. for the diminished value of Bobby Fisher Inc.'s business related to the loss of the right to distribute and sell the NAB Brands. Bobby Fisher Inc. and Cerveceria Costa Rica have been unable to reach agreement or otherwise resolve the issue of the diminished value payable to Bobby Fisher Inc..
On October 22, 2013, this Court entered an agreed order permitting transfer of brands, pursuant to which Cerveceria Costa Rica was ordered to pay its last settlement offer of $511,876.50 to Bobby Fisher Inc. On November 1, 2013, Defendants paid the $511,876.50 to Bobby Fisher Inc., Bobby Fisher Inc.'s inventory of the NAB Brands was purchased and the NAB franchise was transferred to a new distributor.
II. Standard
In federal diversity actions, state law governs substantive issues and federal law governs procedural issues. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Rules of evidence are deemed rules of procedure, 19 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, § 4512 (2d ed.1996); Salas by Salas v. Wang, 846 F.2d 897, 905-06 (3d Cir. 1988), and therefore, the Federal Rules of Evidence, rather than state evidentiary laws, are held to apply in federal diversity proceedings. Barnes v. Owens-Corning Fiberglas Corp., 201 F.3d 815, 829 (6th Cir. 2000). The Sixth Circuit has stated that "[t]he admissibility of expert testimony is a matter of federal, rather than state, procedure." Brooks v. Am. Broad. Cos., 999 F.2d 167, 173 (6th Cir.1993).
However, some state evidentiary rules have substantive aspects, in which case, are applied in diversity settings. See, e.g., CMI-Trading, Inc. v. Quantum Air, Inc., 98 F.3d 887, 891 (6th Cir.1996) Legg v. Chopra, 286 F.3d 286, 289-90 (6th Cir. 2002).
III. Analysis
As the parties represent to the Court, the Ohio Revised Code does not define what is meant by the term "diminished value" in Ohio Revised Code § 1333.85(D). The statutory guidance the Ohio Legislature has provided is limited to this:
the successor manufacturer also shall compensate the distributor for the diminished value of the distributor's business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer. The value of the distributor's business that is directly related to the sale of the terminated or nonrenewed product or brand shall include, but shall not be limited to, the appraised market value of those assets of the distributor principally devoted to the sale of the terminated or nonrenewed product or brand and the goodwill associated with that product or brand.Ohio Rev. Code § 1333.85(D).
Defendant Cerveceria Costa Rica, S.A. is a "successor manufacturer" as that term is used in R.C. §1333.85(D). Bobby Fisher Inc. is a "distributor" as that term is defined in R.C. §1333.82, in that Bobby Fisher Inc. sells and distributes alcoholic beverages to retail permit holders in the State of Ohio.
Both parties assert that there is no governing case law directing the Court how to determine the diminished value of a distributor's business or defining how expansive is the statutory opening to factors to which our consideration "shall not be limited." Id. The parties further claim that this case will establish precedent going forward for how to determine that diminished value.
One problem with subjecting complex issues like valuation to judicial determination is that the court generally must choose among the competing claims of experts. Union Pacific R. Co. v. State Tax Com'n of Utah, 716 F. Supp. 543, 551 (D. Utah 1988). Unless the court performs its own appraisal—a task it is not inclined to undertake—the court must hold either for the plaintiff or the defendant, when often the truth—or at least a more exact picture of reality— lies somewhere in between. Id. The Court, of course, may adjust an expert's appraisal up or down based on other experts' critiques of the appraisal, but the starting point for judicial determination is always one appraisal or another, and each appraisal is based on a particular methodology that, to a large extent, predetermines the result. Thus, implicit in the Court's holding is a decision as to method. Id. at 551-52.
Bobby Fisher put forward an expert witness who performed a calculation of diminished value in a manner he did not normally perform valuations, utilizing pretax numbers. Bobby Fisher's expert hypothesized that Bobby Fisher would see incredible sales growth by resorting to a marketing strategy it had never before attempted-cutting the price margin it demanded of retailers. See Pl. Ex. 10. Bobby Fisher had no evidence to substantiate that it actually had been contemplating such a strategy and no evidence to substantiate the projected sales growth their expert calculated it would generate. In a word, the Bobby Fisher's expert projections were "utterly speculative" Cf. Multimatic, Inc. v. Faurecia Interior Systems USA, Inc., 358 Fed. Appx. 643, 654, 2009 WL 4927957, 1*0 (6th Cir. 2009). See MindGames, Inc. v. W. Publ'g Co., 218 F.3d 652, 658 (7th Cir.2000) ("Damages must be proved, and not just dreamed...."); Schonfeld v. Hilliard, 218 F.3d 164, 172 (2nd Cir. 2000) ("Projections of future profits based upon a multitude of assumptions that require speculation and conjecture and few known factors do not provide the requisite certainty." (internal quotation marks omitted)); Benham v. World Airways, Inc., 432 F.2d 359, 360 (9th Cir. 1970) ("[T]o sustain a claim for [future] profits, facts must exist and be shown by the evidence which afford a basis for measuring the plaintiff's loss with reasonable certainty. The damages must be susceptible of ascertainment in some manner other than by mere speculation, conjecture, or surmise ...." (internal quotation marks omitted)).
Bobby Fisher did allude to growth achieved by manufacturer price cuts. While manufacturers attempt this price strategy, there is no evidence Bobby fisher had ever taken up this strategy itself.
While the parties sharply disputed whether a lost income approach, a valuation approach or a lost profit approach constitutes the best interpretation of the intent of the Ohio Legislature, the Court is only able to decide that the numbers Bobby Fisher utilized in its model were so speculative as to render the model of no use to the Court. This leaves the Court with Cerveceria Costa Rica's methodology not as the definitive manner of calculating the amount dictated by Ohio Revised Code § 1333.82, but as the only rational approach proposed to the Court in this case.
Bobby Fisher's expert testified that the present value of Bobby Fisher's lost profits was $1,526,020, a result reached via untenable suppositions including never-before attempted marketing strategies resulting in unprecedented growth. Moreover, Plaintiff requests that the Court calculate the award in a manner designed to maximize the tax exposure on such awards, an approach apparently aimed at making such awards punitive, causing distributors to hesitate to cancel contracts under the provisions of Ohio law.
The United States Code, at 26 U.S.C.§ 1241 calls for transactions of this nature to be treated as a capital transaction. Bobby Fisher did not lay out a basis for accounting for this cost, apparently because the amounts received were offset by acquisitions of new brands to distribute.
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Bobby Fisher personally testified that the diminished value of his business, full of sentimental value, was $4.5 million.
Cerveceria Costa Rica proposed a five-year period of growth that was negative in the early years, due to residual effects of a prior increase in price of 24 ounce cans of Labatt Blue, to which was added a terminal period designed to capture the residual lost future value reduced to present value. Cerveceria Costa Rica projected sales to fall and then rebound to an anticipated industry growth rate of 0.55% a year. Inflation is projected at a steady annual 1.50% rate. The assumed rate of Bobby Fisher's margin varies in different projections, but the Court finds the 21.1% rate reasonable. Similarly, the Court adopts 4.33% as the amount of avoided costs from Cerveceria Costa Rica's proposed amounts. Avoided taxes are estimated at 34%. Cerveceria Costa Rica also utilizes a discount rate which also varies in the different projections, of which the Court finds 19.98% reasonable. All three projections utilize a terminal industry terminal growth rate of 0.55%.
The Court sees no basis, however, for Cerveceria Costa Rica's adoption of a 1.50% rate of inflation. Instead, the Court takes judicial notice and adopts the Federal Reserve's current estimate of 1.83%. See https://www.clevelandfed.org/inflation-central/201406-inflation- expectations.cfm, visited August 4, 2014. Similarly, the Court rejects Cerveceria Costa Rica's projection of annual losses in sales for Bobby Fisher, had Bobby Fisher retained the rights to distribute the NAB. The Court utilizes instead the projected annual industry growth of 0.55% that Cerveceria Costa Rica utilizes for the terminal years of its estimate, believing this could have been achieved by Bobby Fisher throughout the period.
Substituting these numbers into the model produced by Cerveceria Costa Rica's expert, the Court estimates the diminished value of Bobby Fisher's distributorship as follows:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | Terminal |
| Units | 53,983.00 | 54,279.91 | 54,578.45 | 54,878.63 | 55,180.46 | 55,483.95 | 55,789.11 |
| $/Unit | 12.94 | 13.18 | 13.42 | 13.66 | 13.91 | 14.17 | 14.43 |
| Revenue | 698,489.00 | 715,183.34 | 732,276.69 | 749,778.58 | 767,698.77 | 786,047.27 | 804,834.31 |
| Margin Avoided | 170,625.00 | 151,422.62 | 155,041.72 | 158,747.32 | 162,541.48 | 166,426.33 | 170,404.02 |
| Costs | (30,257.00) | (30,980.16) | (31,720.61) | (32,478.75) | (33,255.01) | (34,049.83) | (34,863.64) |
| Contribution | 140,368.00 | 120,442.46 | 123,321.11 | 126,268.56 | 129,286.47 | 132,376.50 | 135,540.38 |
| Taxes | (47,725.12) | (40,950.44) | (41,929.18) | (42,931.31) | (43,957.40) | (45,008.01) | (46,083.73) |
| Net | 92,642.88 | 79,492.02 | 81,391.93 | 83,337.25 | 85,329.07 | 87,368.49 | 89,456.65 |
| pv factor Present | 1.10 | 1.31 | 1.58 | 1.89 | 2.27 | 2.49 | |
| Value | 72,570.81 | 61,929.91 | 52,849.77 | 45,099.45 | 38,486.54 | 164,275.00 | |
| Total | 435,211.47 |
Thus, the Court calculates that Bobby Fisher's distributorship was diminished by $435,211.47. Because Cerveceria Costa Rica has already paid Bobby Fisher its last settlement offer, $511,876.50. Bobby Fisher having refused to accept this amount as satisfaction of its statutory claims against Cerveceria Costa Rica, it is now required to refund the difference to Bobby Fisher. Bobby Fisher will be ordered to refund to Cerveceria Costa Rica $76,665.03.
DONE and ORDERED in Dayton, Ohio, this Tuesday, August 5, 2014.
s/Thomas M. Rose
THOMAS M. ROSE
UNITED STATES DISTRICT JUDGE