Unpublished Disposition, 932 F.2d 973 (9th Cir. 1991)

MEMORANDUM^** 

Rutman Wine Company ("Rutman") appeals the district court's grant of summary judgment in favor of E. & J. Gallo Winery ("the Winery"). Rutman contends the district court erred by finding "just cause" under the Ohio Alcoholic Beverage Franchise Act¹  ("the Franchise Act") for the Winery's decision to terminate Rutman as a franchise distributor; by rejecting Rutman's claim of bad faith under the Franchise Act; and by directing, as part of its discovery order, the deletion of certain information from other distributors' sales records. We have jurisdiction under 28 U.S.C. § 1291 and we affirm.

The Franchise Act requires both parties to a franchise agreement to act in "good faith" and with "just cause", specifically precluding either party from canceling or failing to renew a franchise for reason "other than just cause". Ohio Rev.Code Ann. at Secs. 1333.84, 1333.85. Although the Franchise Act refers to both "good faith" and "just cause", only "good faith" is actually defined:

Good faith means the duty of any party to a franchise, and all officers, employees, or agents thereof, to act in a fair and equitable manner toward each other so as to guarantee each party freedom from coercion or intimidation; except that recommendation, endorsement, exposition, persuasion, urging, or argument shall not be deemed to constitute a lack of good faith or coercion.

Id. at Sec. 1333.82.

The Ohio Court of Appeals has interpreted the Franchise Act's definition of "good faith" and determined that it provides a special meaning, one that "outlines what acts are wrong, such as coercion, and what acts do not constitute coercion or lack of good faith in this special relationship." Bonanno v. ISC Wines of Cal., 56 Ohio App.3d 62, 564 N.E.2d 1105, 1109 (1989). In this context, "good faith" provides a test for determining whether a manufacturer has "just cause" to terminate a distributor. Id. The court explained:

The statutory definition of good faith is a balanced explanation of what was intended in the franchise relationship. It prohibits acts of coercion and intimidation ... and authorizes non-offensive and non-threatening acts of reasonable business aggressiveness as acceptable. In other words, the issue of just cause is whether the manufacturer commits acts of actual coercion or intimidation, or, in the alternative, whether such acts were honest and reasonable business decisions of any one of the acts authorized in the applicable sections of the statute.

Id.

The Franchise Act does not require a manufacturer to act contrary to its best interests. Excello Wine. Co. v. Monsieur Henri Wines, L.T.D., 474 F. Supp. 203, 210 (S.D. Ohio 1979). Although a finding of "just cause" depends on the facts of each case, inadequate sales performance based on state and national averages offers sufficient justification for a manufacturer's decision to terminate a distributorship agreement. Perfecto Distributing Co. v. Fromm & Sichel, Inc., No. C-2-80-950 (S.D. Ohio 1981) (slip op. at 14); Caral Corp. v. Taylor Wine Co., Inc., No. C-1-80-215 (S.D. Ohio 1980) (slip op. at 12).²  In Caral, the court concluded that,

[w]hile a manufacturer's business dissatisfaction may not be arbitrary, a dissatisfaction based on reason furnishes just cause, particularly if the franchise so provides. Failure of the franchisee to live up to national and state average levels furnishes a reasonable basis for dissatisfaction. It is true there is no evidence in this case on either side of why the plaintiff's performance was static to down [sic] as applied to the state and national averages. A manufacturer need not seek out the cause, but may rely on the result.

Caral Corp., slip op. at 12.

Rutman's argument that the Winery's decision to terminate was arbitrary and based on impermissible grounds was rejected by the district court because the statistical evidence showing a substantial decline in Rutman's sales performance. The court concluded Rutman's poor sales performance adequately supported a finding of "just cause":

[i]t is not for the Court to say whether or not the action of Gallo was intelligent, viewed from a commercial standpoint. Indeed, when faced with this problem, the Ohio courts have consistently held that the requirement of good faith in the Ohio Alcoholic Beverage Franchise Act focuses upon coercion and intimidation, accomplished by express or implied threats of termination. A substantial loss in sales volume has repeatedly been held as a just cause for termination.

ER 253 at 8.

The Winery's decision to terminate Rutman's distributorship may or may not have been prudent from a business standpoint. But that is a matter left to the Winery's business judgment, so long as that decision does not conflict with Ohio law or the terms of the distributorship agreement. The district court held it did not, and we agree.

The district court rejected Rutman's bad faith claim as untimely. Rutman contends that its third amended complaint under the Franchise Act encompasses claims both for "just cause" and "bad faith," and thus the bad faith claim was presented in a timely manner.

Whether the bad faith claim was timely raised is not dispositive, however, because, as the district court determined, the allegations of bad faith did not raise a genuine issue of material fact. Rutman failed to assert the existence of any fact sufficient to show "coercion and intimidation by way of express or implied threats of termination." Rocco Wine Distributors, Inc. v. Pleasant Valley Wine Co., 596 F. Supp. 617, 620 (N.D. Ohio 1984); see also Excello Wine Co., 474 F. Supp. at 209. The district court correctly concluded there was no coercive conduct by the Winery, and we agree.³ 

Rutman also contends the district court erred by ordering the names and locations of various Gallo distributorships to be deleted from sales records provided to Rutman during discovery. We review this discovery order for abuse of discretion. See K.L. Group v. Case, Kay & Lynch, 829 F.2d 909, 915 (9th Cir. 1987). Federal Rule of Civil Procedure 26(c) (4) permits a district court to enter, as part of its discovery order, a protective order requiring "that certain matters not be inquired into, or that the scope of discovery be limited to certain matters." Fed. R. Civ. P. 26(C) (4). The district court did not abuse its discretion by granting the protective discovery order.

AFFIRMED.