California District Court Grants Preliminary Injunction to Pepperidge Farm Distributor

This case illustrates what happens when COVID-19 and the need for ready access to Pepperidge Farm Goldfish crackers collide. Train wreck. You can’t look away.  Pepperidge Farm’s behavior in this litigation certainly is fishy, and the District Court doesn’t seem inclined to catch and release.

In August 2017, Vital Distributions, LLC (Vital) entered into an agreement with Pepperidge Farm, Incorporated (Pepperidge) to serve as its exclusive distribution agent for two California counties.  At the time the parties entered into their agreement, Pepperidge also proffered an E-Commerce Acknowledgment (the Acknowledgment), which purported to put Vital on notice that the parties’ agreement did not prevent Pepperidge from entering into separate distribution agreements through electronic means.  At the time that the parties executed their agreement, Vital rejected the Acknowledgment and refused to sign it.  Vital made clear its understanding that it was to serve as Pepperidge’s exclusive distributor for all purposes in the two California counties.

Vital was aware of an Amazon distribution center in the region.  It knew that its agreement with Pepperidge would be nearly worthless if it had to sign the Acknowledgment.  Pepperidge’s representative warned that Pepperidge might not agree to sign without the Acknowledgment, but in the end Pepperidge did sign.  Under the agreement, Vital got paid for storage and delivery services, and it also received commissions on all distributions, whether through ordinary or e-commerce, within its territory.

The agreement included a carve-out for deliveries to chain stores that insisted on direct deliveries from Pepperidge to their warehouses, but only after Pepperidge attempted in good faith to persuade the chains to use Vital’s services and those chains insisted on bypassing the agreement.  Finally, Pepperidge was contractually obligated to provide amounts of its products to Vital sufficient to guarantee an adequate and fresh supply.

The parties worked together well until COVID hit. Then, product panics hit. Demand for Pepperidge products soared, especially Goldfish crackers, and Pepperidge started meeting that demand through Amazon. Even after shoppers stopped braining each other in pursuit of toilet paper, Pepperidge continue to meet demand through Amazon while providing Vital with half the product it had previously supplied, harming Vital’s business relations with retail stores. Vital’s customers took to ordering the product they so desperately needed through the Internet.

Vital sued alleging breach of contract and breach of the implied covenant of good faith and fair dealing.  It sought an accounting and declaratory relief.   Pepperidge’s motion to dismiss was denied; Vital’s motion for discovery was granted, as was its motion for a temporary restraining order.  Back in April, in Vital Distribution, LLC v. Pepperidge Farm, Inc., the District Court granted Vital’s motion for a preliminary injunction.

Supervillain Snidely Whiplash, auditioning for the role of Pepperidge Farm in the film version of this case

Soon after an unfavorable discovery ruling, Pepperidge Farm sought to exercise a buyback option provided for in Article 20 of the original agreement.  Article 20 permitted Pepperidge Farm to buy back the distributorship for its market value plus 25%.  Charmingly, it exercised this purported option through an e-mail sent by a paralegal providing Vital with thirty minutes notice. It then disabled technology essential to Vital’s distribution services. These actions were then subject to a temporary restraining order.  Pepperidge represented that the parties were working out a settlement that would effectuate the transfer of the distributorship back to Vital. In fact, Pepperidge continued to engage in shenanigans undermining Vital’s relationships with distributors. Pepperidge attempted to characterize its conduct as business as usual.  The parties’ relationship had soured and so it was exercising its buyback option.

The Court had little difficulty concluding that Vital would likely succeed on the merits of its breach of contract claim. Pepperidge did itself no favors by refusing to respond to recovery requests, making it easy for the Court to side with Vital on all material facts that might otherwise be disputed.  Similarly, the Court found that Vital would likely succeed on its claim that Pepperidge invoked the buyback provision in violation of the duty of good faith and fair dealing. Pepperidge presented no evidence of inadequate performance by Vital and thus had no justification for its invocation of the buyback provision or for its curious timing.  Bad faith is an amorphous concept, the Court noted, but we know it when we see it. If something looks like a fish, crunches like a fish, and tastes of cheddar, well, it’s probably a Pepperidge Farm Goldfish being sold through e-commerce distributors in violation of an exclusive distribution agreement.

As you can imagine, the irreparable harm analysis, balance of the equities, and public policy considerations all went Vital’s way.  The Court granted Vital’s motion preliminarily enjoining Pepperidge from terminating or buying back Vital’s distribution rights.