COURT OF APPEALS OF VIRGINIA
Present: Judges Willis, Annunziata and Senior Judge Coleman ∗
Argued at Richmond, Virginia
THE COUNTRY VINTNER, INC.
OPINION BY
v. Record No. 0216-00-2 JUDGE ROSEMARIE ANNUNZIATA
MARCH 6, 2001
ROSEMOUNT ESTATES, INC. AND
VIRGINIA ALCOHOLIC BEVERAGE CONTROL BOARD
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Randall G. Johnson, Judge
Timothy M. Kaine (Mark B. Rhoads; Patricia A.
Collins; McCandlish, Kaine & Grant, P.C., on
briefs), for appellant.
C. Torrence Armstrong (Stephen D. Busch;
Joy C. Fuhr; McGuire, Woods, Battle & Boothe,
L.L.P., on brief), for appellee Rosemount
Estates, Inc.
Louis E. Matthews, Jr., Assistant Attorney
General (Mark L. Earley, Attorney General;
Michael K. Jackson, Senior Assistant
Attorney General, on brief), for appellee
Virginia Alcoholic Beverage Control Board.
In 1986, Rosemount Estates, Inc. and The Country Vintner,
Inc. entered into a written distribution agreement ("the
Agreement") which provided that Country Vintner would be the
exclusive wholesale distributor of Rosemount wines in the
∗
Judge Coleman participated in the hearing and decision of
this case prior to the effective date of his retirement on
December 31, 2000 and thereafter by his designation as a senior
judge pursuant to Code § 17.1-401.
Commonwealth of Virginia. In November, 1996, Rosemount gave
Country Vintner written notice of Rosemount's intent to
terminate the Agreement, claiming Country Vintner had breached
the Agreement's provisions. In December, 1996, Country Vintner
filed a complaint with the Alcoholic Beverage Control ("ABC")
Board alleging that Rosemount did not have "good cause" under
the Virginia Wine Franchise Act, Code § 4.1-406, to terminate
the Agreement. In a final decision dated October 30, 1998, the
ABC Board determined that Rosemount had "good cause" to
terminate the Agreement and dismissed Country Vintner's
complaint. On appeal from the Board's decision, the Circuit
Court for the City of Richmond affirmed the ABC Board's
determination, giving rise to this appeal.
The Country Vintner raises eight questions for review, all
pertaining to whether Rosemount properly terminated the
franchise agreement with Country Vintner. Specifically, Country
Vintner alleges the circuit court erred as a matter of law: (1)
in concluding Rosemount had "good cause" to terminate the
Agreement, despite Country Vintner's "unquestioned record of
success"; (2) in finding Rosemount's request that Country
Vintner alter its marketing structure was a "reasonable
requirement"; (3) in finding the provision in the Agreement
requiring Country Vintner to "contact all
on-premises/off-premises retail licensees within Virginia at
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reasonable intervals and to use its best efforts to sell to them
the Products in an aggressive, effective, and diligent manner"
was a reasonable requirement and that a breach of this provision
provided good cause for termination; (4) in concluding the
Agreement constituted a sufficient writing to allow Rosemount to
impose new distribution requirements on Country Vintner; (5) in
finding Country Vintner failed to substantially comply with
reasonable and material requirements imposed upon it by
Rosemount; (6) in concluding Country Vintner had no reasonable
cause or justification for such failure; (7) in finding a
material deficiency existed in the franchise relationship for
which Country Vintner was responsible; and (8) in failing to
impose a requirement of reasonableness in the Agreement.
For the reasons that follow, we affirm the circuit court's
decision.
BACKGROUND
On appeal, we will review the evidence, and all reasonable
inferences deducible therefrom, in the light most favorable to
Rosemount, the party prevailing below. Metro Machine Corp. v.
Lamb, 33 Va. App. 187, 191, 532 S.E.2d 338, 338 (2000). So
viewed, the evidence establishes that Rosemount and Country
Vintner entered into the Agreement in 1986. The Agreement
granted Country Vintner the exclusive right to distribute
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Rosemount wines in Virginia. 1 The Agreement further provided,
inter alia, that Country Vintner would "contact all
on-premises/off-premises retail licensees within [Virginia] at
reasonable intervals and use its best efforts to sell to them
[Rosemount wines] in an aggressive, effective and diligent
manner."
Initially, Rosemount communicated sales goals to Country
Vintner on an informal, verbal basis; later, Rosemount provided
annual written goals listing the number of cases of its various
wines that should be sold in Virginia. The written goals
identified the expected volume of sales but did not specify
particular geographic areas or stores in which the wine should
be sold.
Over the twelve-year period that Country Vintner operated
under the Agreement, it developed an extensive customer base of
restaurants, specialty wine shops, and large retailers for
Rosemount's wines, showing "steady growth" and "success" in
marketing Rosemount wines in Virginia. However, Country Vintner
failed to distribute Rosemount wines to the large retail grocery
stores in northern Virginia that comprised nearly 68% of the
northern Virginia off-premises retail market. Of the
approximately 168 retail outlets in northern Virginia, Country
1
Code § 4.1-404 prohibits a winery from entering into a
distributorship agreement with more than one wholesaler in a
given territory.
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Vintner only marketed Rosemount wines to eighteen outlets or
approximately 15-22% of the entire retail off-premises market in
northern Virginia. The larger grocery store outlets in northern
Virginia are predominantly affiliated with grocery store chains
such as Giant, Safeway and Shoppers Food Warehouse.
Beginning in 1993, and continuing until it sent the
termination letter in 1996, Rosemount made between fifty and 100
verbal requests of Country Vintner to market Rosemount wines to
the major northern Virginia grocery store chains. Despite
Rosemount's marketing requests, Country Vintner only serviced
eighteen of the 168 retail outlets in northern Virginia and
failed to service the large grocery store chains. Instead,
Country Vintner focused its efforts in the northern portion of
Virginia on other types of retail establishments, such as
gourmet shops and club stores.
On November 12, 1996, Rosemount provided Country Vintner
with ninety-days written notice of Rosemount's intent to
terminate the Agreement on February 10, 1997 as a result of
Country Vintner's failure to market Rosemount wines to the three
largest northern Virginia grocery store chains. In its letter
to Country Vintner, Rosemount alleged Country Vintner had
"breached its obligation to use its best efforts to sell
Rosemount Estates wine to all retail licensees throughout
Virginia under our 1986 agreement . . . ." (Emphasis in
original). The letter included a sixty-day "cure provision,"
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which required Country Vintner to obtain "vendor status" with
Giant, Safeway and Shoppers Food Warehouse retail stores in
specific cities and counties in northern Virginia by January 11,
1997 in order to avoid termination of the Agreement. The letter
also set forth specific quantities of wine that had to be sold
to those stores within the cure period. Country Vintner made no
effort to comply with the demands set forth in the letter and
instead initiated a complaint with the ABC Board alleging that
the proposed termination was without "good cause" as required by
Code § 4.1-406 of the Virginia Wine Franchise Act.
A panel of the ABC Board determined that Rosemount did not
have "good cause" to terminate the Agreement. The panel
recognized Rosemount's right under the Agreement to require
Country Vintner to market Rosemount wines to grocery stores in
northern Virginia, but found that Rosemount had not communicated
specific goals to Country Vintner prior to the November, 1996
letter and that it was "unfair and improper" to use the
termination letter "to establish such goals." The panel ordered
the Agreement remain in effect or that Rosemount pay Country
Vintner reasonable compensation for the value of the Agreement.
The full Board reversed the panel decision on appeal and
ruled that Rosemount had good cause to terminate its Agreement
with Country Vintner. The Board held that Rosemount was not
required to establish specific sales goals for the northern
Virginia portion of the market and that Country Vintner had
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failed to comply with the written terms found in the parties'
1986 Agreement. The Board held:
Despite continued requests from Rosemount
Estates, Country Vintner has not made a
significant effort to sell Rosemount
products to the major Northern Virginia
grocery chains. The Board finds that
Country Vintner has failed to substantially
comply, without reasonable cause or
justification, with the reasonable and
material requests imposed upon it by the
plain terms of the distribution agreement.
Accordingly, the Board finds that good cause
exists for the termination of the
agreement . . . .
Country Vintner appealed to the circuit court, which
affirmed the Board's decision. This appeal followed.
ANALYSIS
In reviewing the decisions of a regulatory agency, the
agency's findings of fact are conclusive if supported by
substantial evidence. Code § 9-6.14:17; Umbarger v. Virginia
Employment Comm'n, 12 Va. App. 431, 432, 404 S.E.2d 380, 381
(1991). However, the issue of whether a winery had "good cause"
to terminate a franchise agreement with a wholesaler is a mixed
question of fact and law reviewable by this Court on appeal.
See Snyder v. Virginia Employment Comm'n, 23 Va. App. 484, 491,
477 S.E.2d 785, 788 (1996) (the determination of "good cause" is
a mixed question of law and fact); Umbarger, 12 Va. App. at 432,
404 S.E.2d at 381; Johnson v. Virginia Employment Comm'n, 8 Va.
App. 441, 447, 382 S.E.2d 476, 478 (1989). We find that
Rosemount had "good cause" to terminate its Agreement with
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Country Vintner under the Wine Franchise Act, Code § 4.1-406,
and that the circuit court did not err in affirming the Board's
decision.
The Wine Franchise Act, Code §§ 4.1-400 - 418, governs all
contracts between wineries and wholesalers. Code § 4.1-402.
One of the stated purposes of the Act is "to prohibit unfair
treatment of wine wholesalers by wineries, promote compliance
with valid franchise agreements, and define certain rights and
remedies of wineries in regard to cancellation of franchise
agreements with wholesalers." Code § 4.1-400(3).
Under the Act, a winery cannot terminate a franchise
agreement with a wholesaler absent a showing of "good cause."
Code § 4.1-406. Code § 4.1-406 provides examples of events that
constitute "good cause." One such example, relevant to this
case, provides that a winery has "good cause" to terminate if it
can prove: (1) the winery imposed a reasonable and material
requirement on the wholesaler; (2) in writing; (3) with which
the wholesaler failed to substantially comply; (4) without
reasonable cause or justification. Code § 4.1-406. In addition
to the enumerated causes, a winery can also rely on other "good
cause" bases, provided the winery can show the cause is based on
a "material deficiency" for which the wholesaler is responsible.
In this case, the Agreement between Rosemount and Country
Vintner required, inter alia, that Country Vintner "contact all
on-premises/off-premises retail licensees within [Virginia] at
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reasonable intervals and use its best efforts to sell to them
[Rosemount wines] in an aggressive, effective, and diligent
manner." As Country Vintner was the exclusive distributor of
Rosemount wines in Virginia, Rosemount had the right to request
that Country Vintner service the entire market. Therefore, the
requirement that Country Vintner use its best efforts to market
Rosemount's wines to all retailers in Virginia was both
"reasonable" and "material" to the exclusive distributorship
relationship.
We reject Country Vintner's contention that the Agreement
was unreasonable because it required Country Vintner to service
all retailers in Virginia. Country Vintner argues that if we
find the requirement to be reasonable, then Rosemount could
terminate the Agreement if Country Vintner failed to service
even one retailer, a result Country Vintner alleges would be
unfair. However, Code § 4.1-406(4) requires only substantial
compliance with the requirement; therefore, if Country Vintner
was servicing all but a few retailers, it would be in
substantial compliance with the requirement.
Country Vintner also contends this contract provision
contravenes the Act's requirement that every term of any
agreement be "reasonable." Code § 4.1-418. However, as
discussed above, we find the contract term in question was
reasonable.
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The evidence establishes that Country Vintner intentionally
bypassed 68% of the retail outlets in northern Virginia, and,
therefore, failed to substantially comply with the written
requirement imposed on it by Rosemount. Country Vintner's
failure to distribute to a large percentage of the off-premises
retail market in northern Virginia was due to its conscious
decision to ignore the large retail grocery stores in the
northern Virginia region and to focus its distribution on
gourmet restaurants, discount houses, and club stores. The
marketing strategy that it adopted was in direct contravention
of the Agreement's requirements that it use its best efforts to
distribute Rosemount wines to all retail outlets. Consequently,
Country Vintner's decision to limit its marketing of Rosemount
wines resulted in the absence of Rosemount wines in more than
two-thirds of the northern Virginia off-premises wine market, a
substantial portion of the overall market encompassed by the
parties' Agreement.
Country Vintner argues that it fully complied with the
Agreement because it sold large quantities of Rosemount wine to
gourmet shops and restaurants. In essence, it argues that its
record of success in other areas of the state precludes a
finding of "good cause" to terminate. However, Country Vintner
fails to consider the potential sales opportunity represented by
the large grocery store retail market, which represents 68% of
the northern Virginia market and fails to acknowledge
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Rosemount's right to maximize its sales and exposure under the
Agreement by requiring that its products be marketed to all
retail stores. Country Vintner's decision to ignore 68% of the
retail market in northern Virginia does not reflect Country
Vintner's "best efforts" to market Rosemount wines "in an
aggressive, effective and diligent manner," as required by the
Agreement. Neither the Act nor the Agreement states that "good
cause" for termination may be found only where the wholesaler
has failed to meet an overall sales goal.
Country Vintner's explanation for its strategy falls short
of a reasonable cause or justification for not complying with
the requirements of the Agreement. Country Vintner claims that
by imposing a requirement that Country Vintner sell to the three
largest grocery store chains in northern Virginia, Rosemount was
demanding that Country Vintner "embark on a new and risky sales
effort." However, the evidence does not support this claim.
Rosemount's request to market to grocery store chains in
northern Virginia was not new. The parties' original Agreement
specifically required that Country Vintner market to all retail
outlets, and Rosemount made numerous verbal requests over a
three-year period for Country Vintner to comply with the terms
of the Agreement. Additionally, marketing to grocery stores was
not a "new" effort for Country Vintner. The evidence shows that
Country Vintner was selling Rosemount wines in grocery stores in
southern Virginia and had, in fact, sold Rosemount wines in the
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past to grocery stores in northern Virginia through a
sub-contracted distributor. Therefore, the evidence belies
Country Vintner's claim that Rosemount's request involved a "new
and risky" sales effort.
We also find no merit in Country Vintner's argument that
because Rosemount knew Country Vintner specialized in sales to
gourmet shops and restaurants at the time they entered the
Agreement, that such a request to service all retail outlets in
Virginia was unreasonable. In the Agreement, Country Vintner
specifically agreed that Rosemount's selection of Country
Vintner as its distributor in Virginia was based on Country
Vintner's representation that it "possesse[d] the necessary
assets, personnel and management skills to effectively sell,
distribute and handle" Rosemount wines in Virginia. Therefore,
Country Vintner was required to comply with Rosemount's
marketing plan, as described in the Agreement.
Country Vintner further contends the requirement to serve
specific outlets is inconsistent with one of the Act's purposes,
viz., to prevent suppliers from dominating local markets through
vertical integration by maintaining a three-tier system for wine
distribution in which the independence of wineries, distributors
and retailers is preserved. The evidence fails to show,
however, in what way Rosemount's requirement that Country
Vintner comply with the Agreement and use its best efforts to
market to all retail outlets erodes the three-tier system which
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the Act is intended to protect. In fact, to the contrary, by
not complying with the terms of the Agreement, Country Vintner
was harming both the winery and the northern Virginia retail
outlets. Country Vintner was the exclusive distributor of
Rosemount wines in Virginia. Therefore, by making no effort to
sell to the northern Virginia grocery stores, Country Vintner
was denying Rosemount the opportunity to sell its product and
denying the stores the opportunity to buy Rosemount wines.
Country Vintner's failure to market Rosemount's wines also
denied Rosemount the ability to compete with the other wine
producers that market their product to the retailers that
Country Vintner chose to ignore. The question is not one of
unduly interfering with or dictating Country Vintner's marketing
strategy; it is, rather, one of contract compliance. Nothing in
the contract gave Country Vintner the right to limit its
distribution to certain retailers, and a marketing effort
directed at all retail outlets in Virginia was within the
contemplation of the parties at the time they executed the
contract.
Country Vintner also argues that the supply of wine from
Rosemount was not sufficiently reliable to permit rapid
expansion of its marketing efforts to the large retail grocery
store outlets in northern Virginia. However, the Board found,
as a factual matter, that Country Vintner had "chosen not to
attempt any significant entry into the grocery store market."
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This finding supports the conclusion that Country Vintner's
decision to selectively market in northern Virginia, and not a
lack of supply, led to its failure to market Rosemount's wines
to the northern Virginia grocery stores.
We also reject Country Vintner's argument that if Rosemount
was not satisfied with Country Vintner's performance in the
northern region, Rosemount should have amended its Agreement
with Country Vintner and assigned northern Virginia to another
distributor. However, the Act does not require that the winery
make such an amendment.
Finally, we find, contrary to Country Vintner's
contentions, the Agreement was sufficient to constitute a
"writing" under Code § 4.1-406. 2 The absence of a specific
marketing plan or set of distribution goals for geographic areas
in the Agreement does not render vague the Agreement's
requirement that Country Vintner use its "best efforts" to
market Rosemount wines to "all retailers" in Virginia. The
written Agreement made clear what was required of Country
Vintner and the numerous verbal requests made over a three-year
period, which Country Vintner acknowledged receiving, further
clarified the requirement.
2
Code § 4.1-406 states that a winery may demand compliance
with "any reasonable and material requirement imposed on [the
wholesaler] in writing."
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For the stated reasons, we find Rosemount had "good cause"
under Code § 4.1-406(4) to terminate its franchise agreement
with Country Vintner. 3 Therefore, we affirm the circuit court
decision.
Affirmed.
3
Because we find that "good cause" existed under one of the
enumerated examples set forth in Code § 4.1-406(4), we need not
address Country Vintner's contention that a "material
deficiency" for which Country Vintner was responsible did not
exist. Code § 4.1-406 ("Good cause shall not be construed to
exist without a finding of a material deficiency for which the
wholesaler is responsible in any case in which good cause is
alleged to exist based on circumstances not specifically set
forth in subdivisions 1 through 4 of this section.").
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