California Court Rules That a Distribution Agreement Cannot Be Constructively Terminated

I realized that I was taking myself far too seriously when I gave a post a ❤️ on Facebook but then later decided that was too much and changed it to a . There, as Flaubert never would have said, L’emoticon jus. 

Similarly, I maintain, California appellate courts have gone too far, deciding that some parts of their opinions are to be “published” and other parts of the same opinion are “unpublished.”

You aren’t fooling anyone. All parts of the opinion are seamlessly available online, and I will cite them for all they are worth.

In this particular instance, I won’t cite to the unpublished portions because, exercising my discretion as blog editor, I do not deem them blogworthy, or at least not worthy of note on this blog.

In the case at hand, Fiji Water Company, LLC (Fiji) entered into a five-year distribution agreement with Carolina Beverage Corporation (Carolina) in 2009, renewed in 2014. The agreement provided that Fiji could “invade” Carolina’s distribution territory, subject to an obligation to pay a “termination fee” of $1/case sold directly. It could also terminate the agreement in its sole discretion, but it would have to pay a “termination fee” of $5/case sold directly over the next year in order to do so. By 2018 Fiji had elected to invade 85% of Carolina’s territory and never elected to terminate. Carolina sued, alleging constructive termination.

The case was tried to a jury, and the jury awarded Carolina nearly $2 million in damages on its constructive breach claim. In the published part of its opinion in Carolina Beverage Corp. v. Fiji Water Company, LLC, released in June, 2024, the California Court of Appeal, Second District reversed, finding that there is no such thing as constructive termination of a distribution agreement under California law and that even if there were such a thing, there was no constructive termination here.

At trial, the court instructed the  jury as follows: 

A party can constructively terminate a contract through its conduct. Constructive termination occurs when one party unilaterally modifies the terms of the contractual relationship in a way that substantially interferes with the other party’s ability to obtain the benefits of the contract, and the relationship between the parties ends. Constructive termination does not require express notice that the contract is being terminated.

As there was no basis to find that Fiji has actually terminated the agreement, the only basis for the jury verdict was constructive termination

The Court of Appeal found that verdict to be erroneous for three reasons. First — and interestingly — California law only recognizes the doctrine of constructive termination in the context of employment agreements and leases. The Court of Appeal explains courts’ willingness to imply a term of constructive termination in those contexts as a matter of public policy. Employees and tenants cannot protect themselves against the wiles of their sophisticated counter parties through contractual means. The terms of their agreements are dictated to them. The same is not true of sophisticated parties such as Carolina, and so there is no need to make the doctrine available to them.

Flag of Fiji, the source of Fiji Water

Second, while sophisticated parties can write a term of constructive breach into their contracts,  the parties did not do so in this case. The Court rejected Carolina’s argument that denying it recovery based on constructive termination left it with no remedy. The remedies available to it were a product of the contract it entered into.

Third, even if constructive termination were available, Carolina did not treat this contract as terminated. It continued to perform until the end of the five year term of the renewal of the original contract. “A party cannot claim that a contract has been terminated if the party continues to act like the contract has not been terminated.”

The Court also refused to construe Fiji’s conduct as a breach of the implied duty of good faith and fair dealing. The Court treated this argument as an attempt to revive its now defunct argument regarding constructive termination. Fiji did not act in bad faith by availing itself of its contractual rights of invasion. The exercise of those rights, clearly granted under the contract, could not be construed as a constructive breach when they were expressly permitted under the parties’ agreement.

The Court thus reversed the trial court’s denial of Fiji’s motion for a judgment notwithstanding the verdict (JNOV). This seems like the right result, but mostly because of the court’s third reason for rejecting the constructive termination argument. Absent Carolina’s failure to make its claims until the end of the contract period, I don’t see why a court could not entertain a constructive termination claim in a new context. Moreover, constructive termination and breach of the duty of good faith and fair dealing are not necessarily the same thing. If the court says constructive termination is not available, would it not consider a good faith and fair dealing objection if Fiji had invaded 99.5% of the Carolina’s territory and yet insisted that it was not terminating?