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Northern Bottling Co., Inc. v. PepsiCo, Inc.

United States District Court, D. North Dakota

November 21, 2017

Northern Bottling Co., Inc., Plaintiff,
PepsiCo, Inc. Defendant,


          Charles S. Miller, Jr., Magistrate Judge.

         Before the court are two motions that address objections made by defendant PepsiCo, Inc. (“PepsiCo”) to certain discovery sought by plaintiff Northern Bottling Co., Inc. (“Northern”). One is Northern's Motion to Compel in which it seeks an order requiring PepsiCo to produce documents it has objected to producing. The other is PepsiCo's Motion for a Protective Order seeking to limit the scope of a Rule 30(b)(6) deposition of PepsiCo noticed by Northern.

         I. BACKGROUND

         PepsiCo has objected to certain discovery sought by Northern on various grounds including overbreadth, lack of relevancy, lack of proportionality, and undue burden. Given these objections, some discussion of the contentions of the parties as well as what the discovery has disclosed so far is necessary.

         A. The parties

         PepsiCo is a long-time leading seller of beverage products herein referred to as PepsiCo branded beverages or products. This includes trademark-protected carbonated soft drinks (“CSDs”), e.g, Pepsi, Mountain Dew, and their various iterations.

         Northern is one of PepsiCo's dwindling number of independent bottlers. In 1955, PepsiCo granted Northern an “Exclusive Bottling Appointment” (“EBA”) pursuant to which Northern acquired exclusive rights to sell “Pepsi” and “Pepsi-Cola” in a territory compromised of all or parts of nine counties located in north-central North Dakota. The largest city within this nine county area is Minot, North Dakota, where Northern's headquarters is located. In 1972, Northern acquired exclusive rights to an additional three counties in South Dakota.[1]

         B. The problem of transshipping and PepsiCo's creation of the PTEP

         Initially, almost all of the bottling and distribution of PepsiCo branded products was done by independent bottlers, like Northern, who were granted exclusive sales territories. PepsiCo officials have acknowledged in the past the critical role independent bottlers played in the company growing to what it has become today.

         There has always been a problem to some degree of product distributed by one bottler finding its way into and being sold in the exclusive territory of another bottler, resulting in that bottler losing the sale. The taking of product produced for sale in one bottler's territory and transporting it for sale in another bottler's territory is referred to in the beverage industry as “transshipment.”

         One of the things that PepsiCo did in 1984 to address the problems of transshipment was to establish the Pepsi Transshipment Enforcement Program (“PTEP”). Under the PTEP, any bottler who finds another bottler's product in its territory can report the “offense” to PepsiCo by submitting a formal complaint. PepsiCo then hires investigators to verify the existence and quantity of the transshipped product, if any. If transshipped product is discovered, PepsiCo levies a fine and assesses the costs of the investigation against the originating bottler, even if the product it originated was transshipped without its knowledge. In other words, the “liability” of the originating bottler is strict. For example, an originating bottler sells PepsiCo branded product to Party A within the originating bottler's exclusive territory, Party A resells the product to Party B still within the originating bottler's exclusive territory, and Party B transships the product for sale to someone within the territory of another bottler. Under the PTEP, the originating bottler is liable for both a fine and the costs of the investigation even if it was unaware of Party B's conduct.

         As recounted elsewhere, in the later part of the 1980's and the 1990's, a combination of (1) changes in the market place, including the emergence of large national retailers (e.g., Walmart, Target, and club stores like Sam's Club and Costco) wanting national sales agreements, and (2) PepsiCo embarking upon a program to begin amassing control of the bottling and distribution network for its beverages, including obtaining control (directly or indirectly) of a number of independent bottlers, led to increased complaints by the remaining independent bottlers and in some cases litigation. See, e.g., Pepsi-Cola Bottling Co. of Pittsburgh, Inc. v. PepsiCo, Inc., 431 F.3d 1241, 1248-52 (10th Cir. 2005) (“Pepsi-Cola Bottling Co. of Pittsburgh”); Mahaska Bottling Co. v. PepsiCo, Inc., __ F.Supp.3d __, 2017 WL 4128563, at **2-3 (S.D. Iowa Sept. 15, 2017) (“Mahaska Bottling Co.”). One of the complaints was that PepsiCo was not doing enough to protect the independent bottlers from transshipping and one of the purported reasons for its lack of diligence was that it was financially benefitting from the transshipment with its ever increasing control of the bottling and distribution of its products even if these bottling operations had to pay some fines after-the-fact under the PTEP. See Pepsi-Cola Bottling Co. of Pittsburgh, Inc., 431 F.3d at 1252-65.

         In 2010, PepsiCo made additional acquisitions of bottling operations that resulted in: (1) a substantial increase in PepsiCo's market share of beverage sales through company-owned bottling and distribution operations to almost 80%, leaving only about 20% of the market to a shrinking number of independent bottlers; and (2) the creation of a new wholly-owed subsidiary of PepsiCo, i.e., Pepsi Beverages Company (“PBC”), to own and operate all of its company-acquired bottling and distribution operations. As discussed in more detail in a moment, Northern contends this has made the problems of transshipment worse for it and other independent bottlers.

         The PTEP as established in 1984 still exists. However, there has been a significant change resulting from PepsiCo's acquisition of upwards of 80% of the distribution market. This is the fact that PBC does not fine itself (nor would it make any sense for it to do so) for product that is transshipped from a geographic area served by one of its company-owned bottling operations to a geographic area served by another of its company-owned bottling operations. The only time that PBC is fined and pays investigation costs is when the product is transshipped and sold in the territory of an independent bottler. The net result is that, for product entering into what at one time were exclusive territories of independent bottlers but are now company-owned operations, there is a significantly less chance of that product being the subject of fines if its leaks out of the intended distribution channels. In other words, there is no financial penalty if that product sloshes around the country in “grey markets” providing a source for transshipped product, except in the odd chance it finds its way into and is sold in the exclusive territory of one of the dwindling number of independent bottlers - and only then if the independent bottler is vigilant enough to catch it.

         C. The contentions of parties in this case

         Northern contends that problems of transshipment for independent bottlers worsened after PepsiCo acquired ownership of almost 80% of the distribution of its products in 2010. Northern claims that, with these acquisitions, (1) PepsiCo has even less incentive to curb transshipment into territories of independent bottlers, since most of the offending transhipped product now comes from its company-owned PBC bottling and distributing operations for which it gets the revenue generated by sales of product leaching into the territories of the independent bottlers instead of that revenue going to them, and (2) the PepsiCo controlled PTEP is no longer effective in combating transhipment. Northern claims these changes, coupled with PepsiCo not taking reasonable steps to address transshipment, created an environment in which certain wholesalers of food, beverages, and other products to convenience and gas stores (C&G's) located in Northern's territory were able to offer transshipped PepsiCo branded beverages to its C&G customers and that, beginning in early 2015, resulted in it losing several of its C&G customers to one or more of these wholesalers.

         Northern claims that PepsiCo has a contractual obligation to protect it from unauthorized sales of transshipped PepsiCo branded product within its territory - if not absolutely, then by taking reasonable steps to prevent encroachment upon its territory of offending product. In support, Northern cites to Pepsi-Cola Bottling Co. of Pittsburgh, supra, wherein the Tenth Circuit held with respect to PepsiCo's obligations to an independent headquartered in Pittsburgh, Kansas:

We conclude - based on the EBA's text, the parties' subsequent actions, and the implied covenant of good faith and fair dealing - that PepsiCo had a duty to take reasonable steps to prevent competing bottlers from encroaching upon Pittsburgh Pepsi's exclusive territory.

431 F.3d at 1259. In reaching this conclusion, the Tenth Circuit held that the Kansas bottler's breach of contract claims were governed by New York's version of the UCC, including its implied covenant of good faith and fair dealing. Northern contends in this case that its EBA is virtually identical to that of the Kansas bottler's in Pepsi-Cola Bottling of Pittsburgh, including the same choice-of-law provision which states that New York law applies.

         PepsiCo disputes Northern's allegations, claiming it takes the problems of transshipment seriously and vigorously pursues and addresses through the PTEP any claims of transshipment that are reported. At the same time, however, PepsiCo does not agree with the Tenth Circuit's decision or its applicability to this case. PepsiCo contends it has no obligation, contractual or otherwise, to prevent transshipment that is done by others and that the PTEP is a voluntary accommodation that it makes to the independent bottlers - not an acknowledgment of any responsibility for third-party transshipment that may be occurring. PepsiCo further contends that Northern's lost sales were principally the result of Northern (1) employing sales tactics that were too aggressive and that upset its customers, and/or (2) charging prices that were too high (thereby creating a situation where transshipment becomes profitable)[2] and not the result of any inadequacy of PepsiCo's efforts to reasonably deal with transshipment, even assuming it has such an obligation. PepsiCo further contends that the amount of product transshipped into Northern's territory was de minimus prior to 2015 when Northern started losing sales to a wholesaler, which, according to PepsiCo, was due to Northern's own conduct. For all of these reasons, PepsiCo contends this case is a lot to do about nothing and, relevant now, does not warrant all of the discovery that Northern is seeking.

         D. Northern's claims of lost sales resulting from transshipping

         Most of the damages that Northern is seeking in this case flow from three different cooperatives (each owning multiple C&G outlets) who terminated their relationship with Northern. When they terminated their relationship, each of the three cooperatives (Enerbase, Envision, and Farmers Union of Devils Lake) turned to Core-Mark for their supply of PepsiCo branded product. Core-Mark is a national wholesaler of products sold by convenience stores, including tobacco products, beverages, and grocery and snack items. When the switch was made by each of the cooperatives, Core-Mark was their primary supplier for other products sold in their convenience stores.

         The PepsiCo branded product that Core-Mark started supplying the cooperatives was all transshipped product. While the price that Core-Mark was charging was less than Northern's, there is evidence from which a factfinder could conclude that the three cooperatives switched to Core-Mark primarily (if not exclusively) because they were dissatisfied with Northern for reasons other than its higher prices. The managers for each of the cooperatives have been deposed and they all have testified they were upset with what they perceived to be Northern's overly aggressive sales tactics. The tactics they considered to be objectionable included Northern's requirement that the cooperatives devote a higher percentage of shelf space to PepsiCo branded products than they were devoting to Coke and other competitive offerings before they could take advantage of Northern's rebates. The cooperatives believed the rebates should be based on volume - not on their making more shelf space available than to PepsiCo's competitors, which they considered to be unfair and unduly intrusive of how they wanted to allocate their shelf space. Also, there is evidence of other issues with respect to one or more of the cooperatives, including dissatisfaction over service, pricing for particular stores, and the manner in which Northern was handling its promotions.

         On the other hand, there is also evidence from which a factfinder might conclude that the three cooperatives would not have left Northern if transshipped PepsiCo branded product had not been readily available from Core-Mark, as well as other competing wholesalers, and that they would have come to some accommodation with Northern despite their differences. This is because, in the absence of another supplier of PepsiCo branded product, the only other alternative for the cooperatives would have to become Coke-only shops for CSD bottle sales and there is evidence which suggests that the cooperatives may not have been willing to go that far and lose sales to customers who preferred PepsiCo product - particularly Mountain Dew, which was by far their largest selling CSD among all of the PepsiCo and Coke offerings.[3]

         Of the three cooperatives who switched to Core-Mark, two have returned to Northern as their source of supply for most of the PepsiCo branded products, albeit on a probationary status and with more limited shelf space, at least initially. The reasons articulated by one or both of the cooperatives for why they returned included a willingness on the part of Northern to change it sales policies, [4] concerns about Core-Mark's reliability as a supplier, and a preference to deal more locally with Northern. Also, another consideration for one of the cooperatives was the fact that Northern bought fuel for its trucks from the cooperative.

         Northern's claim for damages in this case is limited to the sales it lost to the three cooperatives along with a loss of sales for approximately five months to one other standalone convenience store. The first instance of lost sales was in about February 2015 when the first of the three cooperatives terminated its relationship with Northern. PepsiCo points to (1) this fact, (2) its contention that the loss of sales was due to Northern's own conduct, (3) its contention that the total volume of lost sales is a small percentage of Northern's total sales, and (4) evidence which suggests that, prior to February 2015, Northern's problems with transshipment appear to have been de minimus as supporting it argument that this case is much to do about nothing in terms the allegations being made against it and unworthy of the expansive discovery being sought.

         The total loss of sales claimed by Northern as of March 31, 2017, is $439, 936. This is after a setoff for fine recovery under the PTEP of $110, 395. Northern contends that its losses are continuing. At least as to the time of the filing of the present motions, one of the cooperatives (Enerbase) had not returned as a customer. Although Enerbase too had concerns about Core-Mark as a supplier, it was contemplating switching to Henry's Foods (another wholesaler like Core-Mark) for its supply of PepsiCo branded CSDs. Also, apart from Enerbase, Northern lost the sale of fountain products in several of the convenience stores of the two returning customers that had sold PepsiCo branded fountain product but switched to Coke when the cooperatives stopped doing business with Northern and those stores have not switched back in terms of their fountain offerings.

         In addition to seeking general damages, Northern states it will be pursuing punitive damages as well as injunctive relief. Northern's complaint also asks for attorney's fees and costs.

         E. Evidence of the availability of transshipped product from Core-Mark and other wholesalers

         While Core-Mark did not begin selling to the three cooperatives who terminated their relationship with Northern until early 2015 when the first cooperative left Northern, there is evidence that Core-Mark was offering to sell PepsiCo branded products in Northern's territory at least as far back as 2012 and that one or more of the cooperatives were aware of that. Also, there is evidence that Core-Mark was not the only wholesaler who was willing to sell transshipped PepsiCo product. There is evidence that at least two other wholesalers had PepsiCo branded product available for sale in Northern's territory, specifically Henry's Foods and AMCON Distributing.

         F. Evidence as to the origin of the transshipped products

         The evidence indicates that the Pepsico branded product transshipped into Northern's territory from 2012[5] through March 2017 originated from over 25 different bottling operations, including bottling operations located in New York, New Jersey, Pennsylvania, Maryland, Ohio, Illinois, Florida, Texas, Wisconsin, Utah, and even Puerto Rico. The evidence also indicates that most of the transshipped product originated from PBC company-owned bottling operations as opposed to independent bottlers. That being said, there is no credible evidence that the court has seen in the record which indicates that PBC itself transshipped product into Northern's territory. Rather, it appears the product originating from PBC bottlers was transshipped after it was resold one or more times following its initial distribution in an authorized channel.

         G. Northern's use of the PTEP

         Northern was able to recover from the PTEP $137, 828 in fines during the period from 2012 to the beginning of April 2017. Northern contends that its PTEP recoveries do not include compensation for lost sales for transshipments it did not initially discover or that were between complaints. Also, the employment of the PTEP requires an expenditure of substantial resources on Northern's part to ferret out the transshipment, since PepsiCo only initiates an investigation upon complaint. In fact, to recover the above amount of transshipment fines, it appears Northern had to make 34 separate formal complaints. Further, Northern has to be assured of its ability to prove that some transshipment occurred to avoid incurring the costs of PepsiCo's investigation.


         A. Request for Production No. 12

REQUEST FOR PRODUCTION NO. 12: For the subject time period, please produce documents or ESI sufficient to show all disciplinary actions taken against any employees of PepsiCo where the discipline resulted from the employee's violation of any policy or procedure designed to deter transshipping.
RESPONSE: Pepsi objects to Request No. 12 on the grounds that requesting all Pepsi's disciplinary actions taken against any PepsiCo employee related to any violation of policies and procedures designed to deter transshipping without any geographical limitation and over a multiyear period is overbroad, seeks information that is not relevant to the claims or defenses in this case, and is not proportional to the needs of the case. Subject to and without waiving these objections, Pepsi searched for documents or ESI related to any disciplinary actions taken against PepsiCo employees related to the employee's violation of any policy or procedure designed to deter transshipping in connection with transshipments into Northern Bottling's territory for the years 2012-2017 and has not identified or located any such documents.

         COURT RULING: PepsiCo argues that this request is overbroad in that seeks information related to discipline that may have been imposed for transshipment outside of Northern's territory, which it contend is irrelevant to this action. The court disagrees. First, imposing discipline on employees who violate company policies or procedures against transshipment is arguably one of a number of actions that reasonably could be taken to address the problem of transshipment. Second, it is beyond dispute that most of the PepsiCo branded product transshipped into Northern's territory came from PBC company-owned bottling operations. And, while some PBC employees are responsible only for product from PBC bottling operations for which there is no evidence (at least so far) of being the originating bottling operation for product transshipped into Northern's territory, that is not true for upper management who have responsibility for either all of PBC's bottling operations or for multiple PBC bottling operations located in a region. Certainly, for these individuals, whether any of these persons have ever had any discipline imposed against them is relevant. Third, even for employees who are only responsible for product produced by bottling operations for which there is no evidence so far that product has been transshipped into Northern's territory, the fact that discipline has been imposed on other employees may have a deterrent effect on those employees. Finally, as discussed later, company-owned PBC bottling operations for which there is no evidence so far being a source of product that was transshipped into Northern's territory may be a source of transshipped product that created (and still creates today) a reliable source ...

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