Ll Liquor, Inc. v. State of Montana

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

LL LIQUOR, INC., DBA Lolo Liquor, No. 17-35405
Plaintiff-Appellant,
D.C. No.
v. 6:15-cv-00071-
SEH
STATE OF MONTANA; STEVE
BULLOCK, in his official capacity as
the Governor of Montana; MONTANA OPINION
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, Senior District Judge, Presiding

Argued and Submitted May 15, 2018
Seattle, Washington

Filed December 28, 2018
2 LL LIQUOR V. STATE OF MONTANA

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

Opinion by Judge Berzon

SUMMARY **

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 Honorable Stephanie Dawn Thacker, United States Circuit
Judge for the U.S. Court of Appeals for the Fourth Circuit, sitting by
designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 LL LIQUOR V. STATE OF MONTANA 3

COUNSEL

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.

OPINION

BERZON, Circuit Judge:

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
4 LL LIQUOR V. STATE OF MONTANA

“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

I

A

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
1
In a concurrently filed memorandum disposition, we conclude that
Lolo Liquor is entitled to relief on its remaining claim for breach of
contract under state law.
 LL LIQUOR V. STATE OF MONTANA 5

. . . 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 efforts to promptly reduce to
6 LL LIQUOR V. STATE OF MONTANA

writing the specific changes to the provision of this
Agreement that may be required by such change in law.”

B

In 2014, Lolo Liquor was purchased by its current
owners, Josh and Leigh Paffhausen. The Paffhausens
maintain that, around the time of the purchase, they were
given assurances by the DOR that their commission rate
“could never be lowered” during the term of the agreement.
Soon after purchasing Lolo Liquor, the Paffhausens began
an aggressive expansion into the wholesale market, both
around the town of Lolo and beyond. The expansion was
quite successful—in three years, Lolo Liquor was buying
more than ten times as much liquor from the DOR as it had
before the Paffhausens’ purchase. The Paffhausens
attributed their success to innovation and customer service,
while their competitors maintained that Lolo Liquor’s
success was due its higher commission rate, which enabled
Lolo Liquor to provide services that others could not.

Around the time Lolo Liquor was expanding, the Liquor
Store Owners Association of Montana, an industry group,
proposed changes to the commission structure for agency
franchise stores. This proposal was eventually introduced in
the Montana Senate as Senate Bill (SB) 193. In 2015, the
Montana Legislature passed SB 193, and the bill was signed
into law. See 2015 Mont. Laws ch. 362.

SB 193 restructured the way in which commission rates
are calculated. Under SB 193, the commission rates would
no longer be determined by negotiations between the DOR
and each store. Instead, the rates would be based on a preset
schedule reflecting each store’s total liquor purchases from
the DOR during the previous calendar year. The less a store
purchased in the last year, the higher its commission rate
 LL LIQUOR V. STATE OF MONTANA 7

would be. See Mont. Code Ann. § 16-2-101(4)(b)
to -101(4)(c) (2017). Because the amount purchased by each
store is largely based on the store’s sales, this change meant
that stores selling less liquor would receive higher
commission rates—and thus cheaper liquor—from the DOR.
See id. These new rates did not take effect immediately; they
were gradually phased in over the course of two years,
beginning in February 2016. Id. § 16-2-101(4)(a).

Under the new enactment, most agency franchise stores
received a modest increase in their commission rates. Lolo
Liquor, however, saw a reduction. The Paffhausens,
understandably unhappy with the change, refused to sign an
addendum sent by the DOR informing them of the revised
commission structure. The DOR continued to sell liquor to
Lolo Liquor but, in February 2016, unilaterally implemented
the new commission structure in accordance with SB 193,
over the Paffhausens’ objections.

C

Shortly after SB 193 was enacted, Lolo Liquor sued in
state court for, among other claims, breach of contract and
violations of the Contracts Clause of the U.S. Constitution
and its state counterpart. Lolo Liquor’s complaint sought
damages and declaratory and injunctive relief. According to
the complaint, section 2 of the agreement promised that the
commission rate would not change without Lolo Liquor’s
consent during the ten-year term of the agreement.
Montana’s unilateral change of the commission structure,
the complaint alleged, either breached the agreement or
impaired a contractual obligation in violation of the
Contracts Clause.

Montana removed the case to federal district court, after
which Lolo Liquor moved for a preliminary injunction based
8 LL LIQUOR V. STATE OF MONTANA

on its Contracts Clause claims. In response, Montana argued
that Lolo Liquor was unlikely to prevail on its Contracts
Clause claims because, under section 11 of the agency
franchise agreement, the parties had expressly agreed 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.” The district court agreed with the
state and denied Lolo Liquor’s request for a preliminary
injunction. On appeal, a panel of this court affirmed in a
memorandum disposition. LL Liquor, Inc. v. Montana,
649 F. App’x 627 (9th Cir. 2016) (unpublished decision).

Back in the district court, Montana moved for summary
judgment on all claims, and Lolo Liquor cross-moved for
partial summary judgment on its Contracts Clause claims.
The district court granted summary judgment to Montana.
LL Liquor, Inc. v. Montana, No. CV 15-71-H-SEH, 2017
WL 1497872 (D. Mont. Apr. 25, 2017). This appeal
followed.

II

The Contracts Clause provides that “[n]o state shall . . .
pass any . . . Law impairing the Obligation of Contracts,”
U.S. Const. art. I, § 10, cl. 1, thereby “restrict[ing] the power
of States to disrupt contractual arrangements,” Sveen v.
Melin, 138 S. Ct. 1815, 1821 (2018). 2 But not all state

2
The Supreme Court has bounced between using the plural
“Contracts” and the singular “Contract” when referring to this Clause.
Compare, e.g., Sveen, 138 S. Ct. at 1821 (plural), with Evenwel v. Abbott,
136 S. Ct. 1120, 1138 (2016) (singular). Other federal courts have been
similarly inconsistent. Compare, e.g., Allen v. Cuomo, 100 F.3d 253, 256
(2d Cir. 1996) (plural), with RUI One Corp. v. City of Berkeley, 371 F.3d
1137, 1141 (9th Cir. 2004) (singular). Because the text of the Clause uses
 LL LIQUOR V. STATE OF MONTANA 9

regulation of contracts gives rise to a Contracts Clause claim.
Instead, “[t]he threshold issue is whether the state law has
‘operated as a substantial impairment of a contractual
relationship.’” Id. at 1821–22 (quoting Allied Structural
Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978)). “This
inquiry has three components: whether there is a contractual
relationship, whether a change in law impairs that
contractual relationship, and whether the impairment is
substantial.” Gen. Motors Corp. v. Romein, 503 U.S. 181,
186 (1992). 3

Here, no one disputes that the agency franchise
agreement at issue is a cognizable contractual relationship
under the Contracts Clause. We turn, then, to whether
Montana impaired a contractual relationship within the
meaning of the Contracts Clause.

A

The Supreme Court has long rejected the notion that an
interpretive disagreement over a contract—even if that
contract is with a state or municipality—can, on its own,
implicate the Contracts Clause. That argument, the Court has
noted, “reduces itself at once to the proposition that
wherever it is asserted on the one hand that a municipality is
bound by a contract to perform a particular act and the

the plural, so do we. See U.S. Const. art. I, § 10, cl. 1; see also Crosby v.
City of Gastonia, 635 F.3d 634, 638 n.2 (4th Cir. 2011).

3
To be sure, courts do not always proceed methodically from the
first two questions (i.e., whether there was a contractual relationship and
whether that relationship was impaired) to the third (i.e., whether that
impairment was substantial). That is because “[n]ormally, the first two
are unproblematic, and we need address only the third.” Romein,
503 U.S. at 186. As we explain below, this case is different.
10 LL LIQUOR V. STATE OF MONTANA

municipality denies that it is liable under the contract to do
so, thereby an impairment of the obligations of the contract
arises in violation of the Constitution of the United States.”
St. Paul Gaslight Co. v. City of St. Paul, 181 U.S. 142, 149
(1901). And, as St. Paul Gaslight explained, that proposition
“amounts only to the contention that every case involving a
controversy concerning a [governmental] contract is one of
Federal cognizance, determinable ultimately in this court.”
Id.

Consistently with St. Paul Gaslight, we have been
careful to distinguish between situations in which the state
“has ‘impaired the obligation’ of its contract” and those in
which it “has simply breached its contract with the private
party.” Pure Wafer Inc. v. City of Prescott, 845 F.3d 943,
951 (9th Cir. 2017); accord Univ. of Haw. Prof’l Assembly
v. Cayetano, 183 F.3d 1096, 1102–03 (9th Cir. 1999). Pure
Wafer reiterated that “conflating the two concepts would risk
making a federal constitutional case out of even the most
garden variety public contract dispute, transforming the
Contract Clause into a font of state contract law.” 845 F.3d
at 951; see also Horwitz-Matthews, Inc. v. City of Chicago,
78 F.3d 1248, 1250 (7th Cir. 1996). Implementing this
distinction, Pure Wafer concluded that state action does not
“impair” a contractual obligation within the meaning of the
Contracts Clause “so long as it leaves both parties free to
obtain a court-ordered remedy (typically damages) in the
event that either of them fails to perform as promised.”
845 F.3d at 951. But where state action “not only adversely
affects [a party’s] contractual expectations, but . . . slams the
door on any effective remedy,” the Contracts Clause is
implicated. Cayetano, 183 F.3d at 1104; see also Romein,
503 U.S. at 189 (“[C]hanges in the laws that make a contract
legally enforceable may trigger Contract Clause scrutiny if
 LL LIQUOR V. STATE OF MONTANA 11

they impair the obligation of pre-existing contracts, even if
they do not alter any of the contracts’ bargained-for terms.”).

As an example, consider Cayetano. That case considered
a law allowing the state to postpone the dates on which state
employees were paid, despite a prior collective bargaining
agreement providing that those employees would be paid
semimonthly. Cayetano, 183 F.3d at 1102, 1104. That
change in law left the plaintiffs with no remedy under
contract law, as state law did not provide a cause of action
for breach of a labor agreement with the state, and any other
remedies (such as arbitration or a complaint to a state
agency) would be “more theoretical than real.” Id. at 1104.
Because the state had “not merely relieved itself of a
contractual obligation” but “eliminated any avenues of
redress,” we concluded that the state had “impaired” its
contractual obligation within the meaning of the Contracts
Clause. Id.

By contrast, Pure Wafer held the Contracts Clause not
implicated by a city ordinance limiting the amount of
pollutants industrial users were permitted to discharge into
the city’s sewer lines, notwithstanding a preexisting contract
with a plaintiff company authorizing the company to
discharge a certain concentration of pollutant. 845 F.3d at
947–49, 952. There, “the City . . . never asserted the
Ordinance as a defense that would have the legal effect of
discharging the City’s duty to perform.” Id. at 952. Instead,
“the thrust of [the city’s] argument” was that the company
had “‘agreed to comply with environmental regulations,’ and
that the ‘cost of regulatory compliance [was] not a term that
was bargained for.’” Id. at 953 (second alteration in
original). Thus, the city attempted only “to refute the
company’s claimed rights under the Agreement,” not “to
render such rights legally unenforceable.” Id. Accordingly,
12 LL LIQUOR V. STATE OF MONTANA

“the City [did] not impair[] the obligation of its contract.” Id.
at 952.

B

Our question, then, as to whether the Contracts Clause is
implicated is whether, following the enactment of SB 153,
Lolo Liquor would have a remedy under state law against
Montana for breach of contract, if it can establish such a
breach. If Montana would provide a state law remedy, then
its alteration of the commission structure was not an
“impairment” within the meaning of the Contracts Clause. If
it does not so provide, then our inquiry under the Contracts
Clause continues. In making this determination, we look to
what remedies would in fact be available under state law. See
Cayetano, 183 F.3d at 1104.

More specifically, Lolo Liquor maintains here that
Montana promised in the agency franchise agreement that
the commission rate would not change during the ten-year
term of the agreement unless Lolo Liquor consented, but
then breached that promise by lowering the rate in
accordance with SB 193. If Lolo Liquor retains the ability to
recover for this alleged breach under state law, then it does
not have a Contracts Clause claim. See Pure Wafer, 845 F.3d
at 951. We must therefore consider Montana’s defenses to
liability for the alleged breach. Particularly relevant to our
analysis is whether Montana is attempting only “to refute
[Lolo Liquor’s] claimed rights” under the agreement, or
whether the state is trying “to render such rights legally
unenforceable.” Id. at 953.

Here, Montana provides two related reasons why Lolo
Liquor cannot recover for a breach of contract. First,
Montana argues that the parties expressly acknowledged in
section 11 that any provision of the agreement—including
 LL LIQUOR V. STATE OF MONTANA 13

the established commission rate—was subject to
modification by state law. Thus, Montana contends, its
adjustment of the commission rates was fully consistent with
the terms of the agreement. Second, Montana asserts that
“when a state, exercising its sovereign power, enters into a
franchise agreement,” as Montana did here, “the sovereign
may retain the right to unilaterally modify the terms of the
agreement.” Montana therefore suggests that, without regard
to section 11, the state was permitted to adjust the
commission rates without Lolo Liquor’s consent.

Montana’s first argument does not implicate the
Contracts Clause. With that contention, Montana is
responding to a contractual—not a constitutional—argument
made by Lolo Liquor. Lolo Liquor interprets the agreement
to provide a right to a fixed commission rate during the
agreement’s duration; Montana disagrees.

That one of the provisions at issue—section 11—could
permit Montana unilaterally to modify the agreement does
not compel a different conclusion. If the parties agreed that
the commission rate would not change, then Montana
breached the agreement by changing the commission rate. If
the parties agreed that the commission rate was subject to
unilateral modification, then no breach occurred. At bottom,
the parties’ arguments amount to dueling interpretations
between the parties over the proper meaning of their
agreement. As in Pure Wafer, to the extent Montana’s
defense is grounded in the meaning of the contract, the state
has not “attempted to render such [a] right[] legally
unenforceable” but has instead “attempted to refute” the
existence of that right. Id. at 953. Such an attempt does not
trigger Contracts Clause scrutiny.

Our decision in Southern California Gas Co. v. City of
Santa Monica, 336 F.3d 885 (9th Cir. 2003), does not
14 LL LIQUOR V. STATE OF MONTANA

suggest otherwise. There, the asserted “contract” was a city
ordinance that gave rights to a gas company to construct and
maintain “pipes and appurtenances” under the city’s streets.
Id. at 887. Several decades later, the city passed another
ordinance that effectively eliminated those rights. Id. at 888.
In response to a Contracts Clause claim brought by the gas
company, the city argued that the new ordinance did not
substantially impair the contract, because the original
ordinance “subject[ed] the Gas Company’s rights to all
ordinances ‘heretofore or hereafter adopted . . . in the
exercise of [the city’s] police powers.’” Id. at 893 (omission
in original). By agreeing to operate under the ordinance, the
city argued, the company had “expressly acknowledged that
its rights under the [contract] could be altered by future
police power ordinances.” Id. We rejected that argument,
recognizing that the city could not “avoid Contract Clause
analysis merely by establishing that the . . . ordinance [was]
an otherwise legitimate exercise of police power.” Id. We
therefore declined to read the contract “in a way that
reserve[d] to [the city] the power to unilaterally alter the
terms of the agreement.” Id.

In Southern California Gas, however, the gas company
did not bring a breach-of-contract claim; indeed, it is unclear
whether the company could have brought such a claim, given
that the asserted “contract” was another city ordinance. See
id. at 887. 4 Moreover, we specifically noted that “the parties

4
In earlier decisions, the Supreme Court suggested that “the word
‘contracts’ in section 10 of article 1 of the Constitution is used in its usual
or popular sense as signifying an agreement of two or more minds, upon
sufficient consideration, to do or not to do certain acts.” Crane v. Hahlo,
258 U.S. 142, 146 (1922). Later, however, the Court clarified that the
question whether there is a contractual relationship for purposes of the
Contracts Clause is distinct from whether there is a contract under state
law. See Gen. Motors Corp., 503 U.S. at 187 (“The question whether a
 LL LIQUOR V. STATE OF MONTANA 15

agree[d] . . . that the Gas Company’s claim [was] properly
analyzed under the Contract Clause, rather than as a common
breach of contract.” Id. at 889 (citing Cayetano, 183 F.3d at
1102–04). Thus, Southern California Gas had no
opportunity to conclude—as we do here—that dueling
contractual interpretations give rise to only a breach-of-
contract claim, not a Contracts Clause claim. See Estate of
Magnin v. Comm’r, 184 F.3d 1074, 1077 (9th Cir. 1999)
(“When a case assumes a point without discussion, the case
does not bind future panels.”).

Lolo Liquor also relies on the Montana Supreme Court’s
decision in Seven Up Pete Venture v. State, 114 P.3d 1009
(Mont. 2005), to argue that differing contractual
interpretations can give rise to a Contracts Clause claim.
Seven Up Pete, too, is consistent with our approach here. 5

In Seven Up Pete, Montana passed a statute that banned
a certain technique for gold and silver mining. Id. at 1015. A

contract was made is a federal question for purposes of Contract Clause
analysis, and ‘whether it turns on issues of general or purely local law,
we can not surrender the duty to exercise our own judgment.’” (citation
omitted) (quoting Appleby v. City of New York, 271 U.S. 364, 380
(1926))); see also San Diego Police Officers’ Ass’n v. San Diego City
Emps.’ Ret. Sys., 568 F.3d 725, 737 (9th Cir. 2009). Thus, under the
Contracts Clause, the Court has recognized that “a statute is itself treated
as a contract when the language and circumstances evince a legislative
intent to create private rights of a contractual nature enforceable against
the State.” U.S. Tr. Co. of N.Y. v. New Jersey, 431 U.S. 1, 17 n.14 (1977).
Whether that statute also constitutes a contract under state law and so
gives rise to a cause of action for breach of contract is a separate inquiry.

5
Of course, were Seven Up Pete inconsistent with our analysis, we
would not be bound by it, as the issue here is the reach of the federal
Constitution. See Taylor v. San Diego County, 800 F.3d 1164, 1171 (9th
Cir. 2015).
16 LL LIQUOR V. STATE OF MONTANA

mining company that had previously received a state-issued
mining lease challenged enforcement of the statute, alleging
that it violated the Contracts Clause by impairing the mining
lease. See id. In response, Montana argued that the mining
lease was not substantially impaired because the lease
expressly stated that the company “agreed to ‘fully comply
with all applicable state and federal laws, rules and
regulations.’” Id. at 1022. Seven Up Pete rejected this
position, reasoning that the provision could not “reasonably
be construed to contemplate a . . . ban of the one mining
method admittedly contemplated by the parties,” and
ultimately concluded that the ban substantially impaired the
mining company’s contractual relationship with Montana.
Id.

Importantly, the mining lease in Seven Up Pete did not
in terms provide that the company would be permitted to use
the mining technique at issue. Instead, the lease was “based
on the assumption, held by all parties, that the [mining
technique] would be used.” Id. (emphasis added). Indeed,
Seven Up Pete confirmed that the mining company “lacked
a . . . contract right to use” the specified mining technique.
Id. Given that the mining company could not successfully
challenge the mining technique ban as a breach of contract,
Seven Up Pete’s conclusion that the company could bring a
Contracts Clause claim is in accord with our reasoning here.
See id.; cf. Cayetano, 183 F.3d at 1104. 6

6
As noted above, whether a contractual relationship exists for
purposes of the Contracts Clause is separate from whether a contract
exists under state law. See supra note 4. It is therefore possible for a
plaintiff to state a claim under the Contracts Clause but not under state
contract law. We express no view on the correctness of Seven Up Pete’s
ultimate holdings with respect to either the Contracts Clause or state
contract law.
 LL LIQUOR V. STATE OF MONTANA 17

Montana’s second argument—that the state was
permitted within its sovereign power to modify the
commission rate whether or not doing so breached the
contract—raises the specter of a Contracts Clause problem.
An assertion that the state always has the unilateral authority
to modify the provisions of a contract is inconsistent with the
requirements of the Contracts Clause, which prohibits a state
from “simply walk[ing] away from its financial obligations.”
Energy Reserves Grp., Inc. v. Kan. Power & Light Co.,
459 U.S. 400, 413 n.14 (1983). 7 Not surprisingly, no such
authority exists.

The cases on which Montana relies establish that a state
does not give up its sovereign power by contracting with
others. See U.S. Tr. Co., 431 U.S. at 23–24; see also Ft.
Smith Light & Traction Co. v. Bd. of Imp. of Paving Dist.
No. 16, 274 U.S. 387, 390 (1927). It is an entirely different
question whether a state may avoid financial liability when
future exercises of the state’s sovereign power breach a
contract and result in financial harm. As we noted in Pure
Wafer, it is commonplace for states and municipalities to
promise regulatory stability and pay damages if, for
whatever reason, the promise is ultimately not kept. See
845 F.3d at 955–96. The Supreme Court, too, has recognized
that such arrangements are permissible. See United States v.

7
We do not understand Montana’s argument to rest on state law
concerning its sovereign prerogatives. All the case authority cited by the
state is federal. Again, if state law did allow Montana unilaterally to
modify contracts between itself and others without providing a damages
remedy, then the federal Contracts Clause would be squarely implicated.
But we have been provided no basis for so construing Montana law. To
the contrary, the Montana Supreme Court has recognized that the state
has affirmatively waived sovereign immunity for claims relating to
express contracts. See Peretti v. State, 777 P.2d 329, 333 (Mont. 1989);
see also Mont. Code Ann. § 18-1-404(1)(a) (2017).
18 LL LIQUOR V. STATE OF MONTANA

Winstar Corp., 518 U.S. 839, 871 (1996) (plurality opinion).
These types of contracts do not “bind [the government] to
ossify the law in conformity to the contracts.” Id. Instead,
under these contracts, “the Government assume[s] the risk
that subsequent changes in the law might prevent it from
performing, and agree[s] to pay damages in the event that
such failure to perform cause[s] financial injury.” Id.

If Montana did promise to maintain Lolo Liquor’s
commission rate regardless of future changes in the law, it
still retained its sovereign power to change the law. That
Lolo Liquor, as the recipient of that promise, is entitled to
recover for damages resulting Montana’s breach does not
detract from that conclusion.

Because this alternative argument is baseless, Montana
cannot rely on it to avoid Lolo Liquor’s claim for breach of
contract. Thus, this argument too does not “render [Lolo
Liquor’s] rights legally unenforceable,” and so does not
implicate the Contracts Clause. Pure Wafer, 845 F.3d at 953.

C

As Lolo Liquor’s ability to recover under state law
remains intact, we conclude that Montana’s passage of
SB 153 did not impair a contractual obligation under the
Contracts Clause. Lolo Liquor therefore has no claim under
the Contracts Clause, and the district court did not err in
granting summary judgment to Montana on this claim.

III

In sum, we hold that Montana did not impair its
contractual obligation to Lolo Liquor within the meaning of
the Contracts Clause, because it did not eliminate Lolo
Liquor’s remedy for breach of its contract with the state.
 LL LIQUOR V. STATE OF MONTANA 19

Accordingly, we affirm the district court’s grant of summary
judgment to Montana on Lolo Liquor’s Contracts Clause
claim. We address Lolo Liquor’s breach-of-contract claim in
a memorandum disposition filed concurrently with this
opinion.

AFFIRMED.