Sims Wholesale Co. v. Brown-Forman Corp.

Present: Carrico, C.J., Compton, Stephenson, and Keenan, JJ.,
and Poff, Senior Justice, Whiting, Senior Justice, and Cochran,
Retired Justice

SIMS WHOLESALE COMPANY,
INC., ET AL.
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 951144 April 19, 1996

BROWN-FORMAN CORPORATION

VIRGINIA ALCOHOLIC BEVERAGE
CONTROL BOARD

v. Record No. 951142
BROWN-FORMAN CORPORATION

FROM THE COURT OF APPEALS OF VIRGINIA

In these appeals in a case originating before an

administrative agency, we are confronted with a question of

statutory interpretation.

We are dealing with Virginia's Wine Franchise Act (the Act),

Code §§ 4.1-400 through -418 (Repl. Vol. 1993), a part of the

Alcoholic Beverage Control Act. This controversy arose in

September 1989. At that time, the Act was codified in §§ 4-

118.42 through -118.61 (Supp. 1989). The Act's provisions

pertinent to this appeal are the same in both versions. Thus,

for clarity we shall refer to the statutes in effect at the time

of the May 1995 decision from which this appeal was taken, that

is, the version found in the 1993 Replacement Volume of the Code.

The Act is to be "liberally construed and applied to promote

its underlying purposes and policies." Code § 4.1-400. One such

purpose and policy is to "promote the interests of the parties

and the public in fair business relations between wine
wholesalers and wineries, and in the continuation of wine

wholesalerships on a fair basis." Id. The Act defines "winery"

to include any corporation which enters into an agreement with

any Virginia wholesale wine licensee and which "manufactures or

sells any wine products, whether licensed in the Commonwealth or

not." Code § 4.1-401.

Other stated purposes and policies included in the Act are

to "preserve and protect the existing three-tier system for the

distribution of wine," Code § 4.1-400(2); to "prohibit unfair

treatment of wine wholesalers by wineries" and to "define certain

rights and remedies of wineries in regard to cancellation of

franchise agreements with wholesalers," id. at (3); and, to
"establish conditions for creation and continuation of all

wholesale wine distributorships" consistent with all applicable

laws, id. at (4).

The focus of this appeal is upon a winery's attempted

cancellations unilaterally of agreements with certain Virginia

wine wholesalers. As pertinent, the Act provides that "no winery

shall unilaterally amend, cancel, terminate or refuse to continue

to renew any agreement" unless the winery has given the required

statutory notice and unless "good cause" exists for such

cancellation or termination. Code § 4.1-406.

The Act further provides, "Good cause shall include, but is

not limited to" certain enumerated circumstances. Id. Among the

circumstances is revocation of the wholesaler's license to do

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business in the Commonwealth; bankruptcy or receivership of the

wholesaler; assignment for the benefit of creditors or similar

disposition of the wholesaler's assets; and a wholesaler's

failure to comply, without reasonable justification, with any

written, material requirement imposed by the winery. Id.

The Act also provides, "Good cause shall not include the

sale or purchase of a winery." Id. In addition, the Act

provides that, except for "discontinuance of a brand or for good

cause as provided in § 4.1-406, the purchaser of a winery shall

become obligated to all of the terms and conditions of the

selling winery's agreements with wholesalers in effect on the

date of purchase." Code § 4.1-405(A).
And, if a winery accomplishes termination or cancellation of

an agreement without good cause, the Act provides a procedure for

the wholesaler to receive from the winery reasonable compensation

for the value of the agreement. Code § 4.1-409(A).

This case has been litigated upon a stipulation of facts.

Appellee Brown-Forman Corporation (the winery), with principal

offices in Louisville, Kentucky, manufactures and sells wine

products. Prior to September 27, 1989, the winery supplied its

brands of wines to certain Virginia wholesalers for distribution

in designated territories pursuant to written agreements. In the

agreements, the parties expressly acknowledged the contracts were

subject to the Act.

The winery, exercising its business judgment, determined

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that its brands could be more effectively marketed by fewer

wholesalers over broader geographic areas. The winery's

experience had been that consolidation of its brands into fewer

wholesalers increases "market penetration," sales of its

products, and profits for both the winery and its wholesalers.

Thus, by letters dated September 27, 1989, the winery notified

Virginia wholesalers of its "major reorganization of its sales

organization" and that it would terminate existing agreements.

The winery planned to consolidate from 18 wholesalers in Virginia

to four.
Eleven of the wholesalers are parties appellant. They are:

Sims Wholesale Company, Inc.; House of Beverages, Inc.; James

River Beverage Company; Holston Valley Distributing Co., Inc.;

Circle Sales, Inc.; Roanoke Distributing Co., Inc., trading as

J.P. Distributing; Shenandoah Valley Distributing Co., Inc.,

trading as Dixie Beverage Company; Service Distributing, Inc.;

Lawrence and Nester Distributing Company; Eastern Shore Beverage

Distributing, Inc.; and Virginia Imports, Ltd.

Shortly after receiving the termination notices, the

wholesalers filed petitions with the Virginia Alcoholic Beverage

Control Board (the Board) seeking a determination that the winery

had violated the Act, and asking that the notices of intent to

terminate the agreements be declared null and void.

Subsequently, the parties presented the cases to the Board on the

stipulation with a single issue for consideration.

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 The following additional facts are included in the

stipulation. The winery's termination notices did not allege any

deficiencies on the part of the wholesalers. The winery's

decision to market its brands through fewer wholesalers over

broader geographic areas, when viewed from the winery's

perspective, was in its economic self interest. The winery's

decision that its own economic self interest is served by the

consolidation, while erroneous from the wholesalers' perspective,

is not clearly arbitrary, capricious, or irrational from the

winery's perspective. The winery's decision was made in good

faith and constitutes a good faith exercise of business judgment.
The parties stipulated that the sole issue presented is

whether the good faith exercise of business judgment by the

winery, absent any evidence of deficiencies in the wholesalers'

performances, is "good cause" pursuant to the Act for the winery

to terminate unilaterally its agreements with the wholesalers

without reasonable compensation.

Following a hearing, a panel of the Board's hearing officers

concluded in July 1991 that the Act "contains no language that

permits a winery's unilateral cancellation of agreements with

wholesalers in order to consolidate its distributors and to

enhance its economic interests in the absence of wholesaler

deficiency." On appeal, the Board adopted the panel's decision,

ruling that the winery's reasons for terminating its agreements

with the wholesalers do not constitute good cause within the

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meaning of the Act.

The winery appealed the Board's decision to the Circuit

Court of Fairfax County. Although not agreeing with all the

Board's reasoning, the court (Judge Jane Marum Roush), in a

January 1994 letter opinion, affirmed the Board's decision. The

court determined "that the specific business judgment exercised

by Brown-Forman in this case to streamline its operations,

without more (and particularly without allegations of any

deficiencies on the part of the wholesalers), is not sufficient

`good cause' under the statute." The court noted that, contrary

to the winery's argument, the winery "is not shackled to the

wholesalers until it is forced by the economic inefficiencies of

the agreements to go out of business . . . . Instead, it must

continue its agreements with the wholesalers or pay them

reasonable compensation for the value of the agreements."
The winery appealed the circuit court's decision.

Subsequently, a panel of the Court of Appeals ruled unanimously

in favor of the winery. Brown-Forman Corp. v. Sims Wholesale

Co., 20 Va. App. 423, 457 S.E.2d 426 (1995). The court

determined that the term "good cause," as it relates to

termination of a distribution agreement under the Act, is

unambiguous. "Considered together and in proper context, the

words simply mean a `well-founded' `reason.'" 20 Va. App. at

431, 457 S.E.2d at 430. Accordingly, the appellate court agreed

with the trial court that the Board erroneously restricted

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statutory "good cause" to instances of wholesaler deficiency, and

remanded the proceeding to the Board for reconsideration of the

issue. Id.

Determining that the decision of the Court of Appeals

involves a matter of significant precedential value, Code § 17-

116.07(B), we awarded the wholesalers and the Board separate

appeals.

Initially, we shall dispose of an argument advanced by the

Board, but not the wholesalers, that the Court of Appeals failed

to give proper deference to the Board's decision. Pointing out

that courts play a limited role in reviewing agency decisions

under the pertinent provisions of the Administrative Process Act,

Code § 9-6.14:17, the Attorney General argues "the judiciary

should not substitute its judgment for that of the Board

concerning how the Act should be implemented" when, as here, the

Board interprets the Act consistent with legislative guidelines.

The Attorney General contends the Court of Appeals' decision

violates that principle. We do not agree the Board's decision in

this case should be accorded the great deference urged by the

Attorney General.
The sole issue involves a question of statutory

interpretation. The issue does not involve "the substantiality

of the evidential support for findings of fact," id. at (iv),

which requires great deference because of the specialized

competence of the agency. Instead, when, as here, the question

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involves a statutory interpretation issue, "little deference is

required to be accorded the agency decision" because the issue

falls outside the agency's specialized competence. Johnston-

Willis, Ltd. v. Kenley, 6 Va. App. 231, 246, 369 S.E.2d 1, 9

(1988). In sum, pure statutory interpretation is the prerogative

of the judiciary. See Hampton Roads Sanitation Dist. Comm'n v.

City of Chesapeake, 218 Va. 696, 702, 240 S.E.2d 819, 823 (1978).

Thus, we turn to the question of law presented, the crux of

the issue being to determine the meaning of "good cause" as used

in the Act. The wholesalers and the Board, contending the term

as employed in Code § 4.1-406 is ambiguous, argue "good cause"

does not exist unless there are wholesaler deficiencies. The

winery, contending the Court of Appeals correctly ruled the term

to be unambiguous, argues that "good cause" under § 4.1-406 is

always satisfied when a winery terminates a wholesale agreement

unilaterally in the good faith exercise of its business judgment.
In order to decide the precise issue presented by these

stipulated facts, there is no necessity for us to rule on the

question whether the term "good cause" is clear or vague. We

will agree with the Court of Appeals and assume without deciding

that the term as used in § 4.1-406 is unambiguous. Nonetheless,

we disagree with the Court of Appeals that § 4.1-406 "good cause"

merely means "a `well-founded' `reason.'" Brown-Forman Corp., 20

Va. App. at 431, 457 S.E.2d at 430.

Like the circuit court, we decline to adopt either argument

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made by the opposing parties. We reject the position of the

wholesalers and the Board that "good cause" under the statute as

it existed in September 1989 requires in every instance

establishment of wholesaler deficiency. Were that the case, the

legislature performed a meaningless act by including in the

statute an example of what is not "good cause," that is, the term

"shall not include the sale or purchase of a winery." Every part

of a statute is presumed to have some effect and no part will be

treated as meaningless unless absolutely necessary. Raven Red

Ash Coal. Corp. v. Absher, 153 Va. 332, 335, 149 S.E. 541, 542

(1929).

We also reject the position of the winery, implicitly

endorsed by the Court of Appeals, that "good cause" always exists

when a winery unilaterally cancels a wholesaler agreement in the

good faith exercise of its business judgment. Under such an

approach, potentially any decision of a winery, not made in bad

faith or arbitrarily, to so terminate existing agreements could

be viewed as a good faith exercise of business judgment. If such

a decision were sufficient to establish "good cause," the Act's

statutory protections also would be meaningless. See Wright-

Moore Corp. v. Ricoh Corp., 908 F.2d 128, 137 (7th Cir. 1990)

(franchisor's nonrenewal of distributorship agreement for

internal economic reasons, though not shown to be in bad faith,

was not for good cause).

An examination of the winery's specific business decision

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made in this case requires the unavoidable conclusion that the

winery has not established sufficient "good cause" under the

statute. According to the stipulation, the winery's "basis for

the terminations was its desire to consolidate its brands into

fewer wholesalers over broader geographic areas."

To determine whether "consolidation" or so-called "down-

sizing" amounts to statutory "good cause," we examine other

portions of the Act, specifically portions dealing with the sale

of a winery. Code § 4.1-406, as we have noted, provides that

"good cause" shall not include the sale or purchase of a winery.

Code § 4.1-405(A) provides that, except for discontinuance of a

brand or for § 4.1-406 "good cause," the purchaser of a winery is

obligated to all the terms and conditions of the seller's

agreements with wholesalers in effect on the purchase date. Code

§ 4.1-405(B)(1) provides that if the surviving winery distributes

in Virginia brands of the nonsurviving winery, which that winery

marketed prior to the purchase, those brands shall be distributed

through any wholesalers who were distributors in Virginia for the

nonsurviving winery.
As the circuit court observed, the purchase and sale of a

winery likely may lead to some duplication in the pre-sale

distribution network of the two wineries thus requiring "some

streamlining or other internal reorganization" by the surviving

winery. In other words, when one winery purchases another, thus

inheriting a duplicative network of Virginia distributors,

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efforts to consolidate become probable. Yet the statute

specifically provides that the sale or purchase of a winery is

not "good cause" for termination of wholesaler agreements. If

the General Assembly had meant that a winery's consolidation of

its distributorships to streamline operations would amount to

"good cause," it would have so provided in the situation of a

sale or purchase of a winery.

Thus, we hold, under the stipulated facts, that the winery's

good faith exercise of business judgment, there being no evidence

of deficiencies in the wholesalers' performances, is not "good

cause" under the Act for the winery to terminate unilaterally its

agreements with the wholesalers without reasonable compensation.
Before concluding, we shall mention a contention made by the

wholesalers, but not the Attorney General, during oral argument

at the bar of this Court on February 29, 1996. Two days prior to

the argument, counsel for the wholesalers notified the Court of

an enactment passed by the General Assembly and signed into law

by the Governor as emergency legislation effective February 26,

1996. This enactment amended § 4.1-406 of the Act.

In essence, the amendment provides that "good cause" shall

not be construed to exist without a finding of a material

deficiency for which the wholesaler is responsible. According to

its provisions, the amendment applies in any case in which "good

cause" is alleged to exist based on circumstances not

specifically set forth in the subdivisions of the statute that

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enumerate certain examples of wholesaler deficiencies. The

enactment also provides: "That the provisions of this act are

declaratory of existing law." Acts 1996, ch. 3.

At the bar, counsel for the wholesalers contended that, in

the amendment, the General Assembly made "a legislative

interpretation of the original Act." Counsel said, however, that

the amendment is "not binding on this Court," that it is

"persuasive" only, and that the Court can "weigh" the amendment

"however you see fit." Counsel for the winery contended inter

alia that the amendment, enacted while the very issue it

addresses was being considered by the Court, is unconstitutional

because it violates the separation of powers doctrine set forth

in Article I, Section 5 of the Constitution of Virginia ("the

legislative, executive, and judicial departments of the

Commonwealth should be separate and distinct"). Counsel for the

winery also argued that the amendment is retroactive legislation

impairing the obligation of its contracts in violation of Article

I, Section 11 of the Constitution of Virginia, citing Heublein,
Inc. v. Department of Alcoholic Beverage Control, 237 Va. 192,

196-97, 376 S.E.2d 77, 78-79 (1989) (pre-1989 version of the Act

declared unconstitutional in its entirety).

We shall not rule on the effect, if any, of the enactment on

the issue presented in this case because we have confined our

analysis of the Act to the provisions that were in place in

September 1989 when this controversy arose.

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 Accordingly, the judgment of the Court of Appeals will be

reversed and final judgment will be entered here reinstating that

portion of the Board's "Final Decision and Order" dated

November 22, 1991, as follows:
"It is ordered that the notices of intent dated
September 27, 1989 to terminate the agreements between
the respondent[] and the petitioners be, and hereby are
declared null and void.

"It is further ordered that respondent Brown-Forman be,
and hereby, is, ordered to (i) continue its agreements
with the petitioners for the distribution of its wines
within the petitioners' primary areas of responsibility
or (ii) in the alternative, pay the petitioners
reasonable compensation for the value of the agreements
pursuant to Section 4-118.50 [now § 4.1-409] of the
Act."

Reversed and final judgment.

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