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High Falls Operating Co., LLC v. Boston Beer Corp.

June 8, 2010

HIGH FALLS OPERATING CO., LLC, NORTH AMERICAN BREWERIES, INC., AND KPS CAPITAL PARTNERS LP, PLAINTIFF,
v.
BOSTON BEER CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Charles J. Siragusa United States District Judge

DECISION AND ORDER

INTRODUCTION

This is a diversity action arising from a contractual dispute, in which Plaintiffs seek permanent injunctive relief and a declaratory judgment that they are not required to arbitrate certain aspects of the dispute. Now before the Court is an application (Docket No. [#7]) by Plaintiffs for a preliminary injunction prohibiting Defendant from arbitrating certain claims in an arbitration action that Defendant commenced on or about February 8, 2010. For the reasons that follow, the application is denied.

BACKGROUND

Plaintiff High Falls Brewing Company, LLC ("HFBC") was a brewing company located in the High Falls District of the City of Rochester, New York. In addition to brewing its own brands of beer, HFBC performed contract brewing services for third parties, including Defendant Boston Beer Corporation ("Boston Beer" or "Defendant"). In December 2004, HFBC and Boston Beer executed an agreement entitled "Third Amended and Restated Production Agreement Between Boston Beer Corporation And High Falls Brewing Company, LLC ("the Production Agreement").*fn1 The Production Agreement states that it will "interpreted and construed in accordance with the law of the State of New York." (Id. § 21). The Production Agreement contains an arbitration clause, which states, in pertinent part:

26. ARBITRATION

Any controversy or claim arising out of or relating to this December 2004 Agreement, or the breach hereof, with the exception of any claim for a temporary restraining order or preliminary or permanent injunctive relief to enjoin any breach or threatened breach hereof, shall be settled by binding arbitration to be conducted by the American Arbitration Association ('AAA') in New York City in accordance with the Optional Procedures for Large Complex Commercial Disputes (the "Complex Procedures"), and to the extent any such matter is not addressed by the Complex Procedures, in accordance with the Commercial Arbitration Rules of applying the laws of New York. (Id. § 26).

As part of the Production Agreement, HFBC and Boston Beer anticipated that it would be necessary for Boston Beer to purchase new equipment and parts for use at HFBC's plant. (Production Agreement § 9). The Production Agreement refers to a lease to cover such equipment, entitled the Equipment Lease for Required Additional Equipment ("the Additional Equipment Lease"). (Id.).*fn2 The Additional Equipment Lease was executed at the same time as the Production Agreement. The Production Agreement states that at the end of the contract term, the disposition of equipment under the Additional Equipment Lease "shall be determined in accordance with the terms outlined in the [Additional Equipment Lease]." (Id. § 9(d)). The Additional Equipment Lease contains a provision that states, in pertinent part: "5.5 ENTIRE AGREEMENT. This Equipment Lease and the Production Agreement constitute the entire agreement between Lessor and Lessee with respect to the lease of the Leased Assets." (Additional Equipment Lease § 5.5) (emphasis added). The Additional Equipment Lease also contains a forum selection/dispute resolution clause, which states:

5.7 GOVERNING LAW AND JURISDICTION. THIS EQUIPMENT LEASE SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES. THE PARTIES CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE NEW YORK AND THE FEDERAL COURTS SITTING IN NEW YORK, FOR THE RESOLUTION OF ANY DISPUTES UNDER ANY LEASE DOCUMENT. (Id. § 5.7). The Additional Equipment Lease contains no reference to arbitration.*fn3

The Production Agreement also refers to another lease, entitled the Equipment Lease for Bottling Line 2 ("the Line 2 Lease").*fn4 The Line 2 Lease was executed at the same time as the Production Agreement. The Line 2 Lease covers equipment that had apparently been purchased by Boston Beer and installed in HFBC's plant pursuant to an earlier version of the Production Agreement. The Line 2 Lease contains a provision stating, in pertinent part: "5.5 ENTIRE AGREEMENT. This Equipment Lease constitutes the entire agreement between Lessor and Lessee with respect to the Leased Assets." (Line 2 Lease § 5.5). The Line 2 Lease further contains a section entitled "Remedies," which states, in pertinent part, that in the event of any default under the lease, Boston Beer "may exercise any one or more of the following remedies: (a) proceed, by appropriate court action, to enforce performance by Lessee of the applicable covenants . . . ." (Id. § 4.2) (emphasis added). The Line 2 Lease also contains a forum selection/dispute resolution clause, which states:

5.7 GOVERNING LAW AND JURISDICTION. THIS EQUIPMENT LEASE SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES. THE PARTIES CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE NEW YORK AND THE FEDERAL COURTS SITTING IN NEW YORK, FOR THE RESOLUTION OF ANY DISPUTES UNDER ANY LEASE DOCUMENT. (Id. § 5.7). The Line 2 Lease contains no reference to arbitration.

In April 2006, HFBC and Boston Beer executed a supplement to the Production Agreement, entitled "Third Amended and Restated Production Agreement - Supplement." ("the April 2006 Supplement"). In pertinent part, the April 2006 Supplement grants Boston Beer a "continuing security interest" in certain production equipment, including equipment "purchased by Boston Beer to modernize [HFBC's] No. 2 bottling line." (April 2006 Supplement, Schedule B, p. 3 ). The Supplement further states: "Except as modified by the foregoing provisions, the Agreement [Production Agreement] and the other contractual arrangements contained therein, as currently in effect, will remain unaffected." (Id. at p. 2).

In June 2006, HFBC and Boston Beer executed another supplement to the Production Agreement, entitled "Third Amended and Restated Production Agreement -Supplement ("the June 2006 Supplement"). In pertinent part, the June 2006 Supplement grants Boston Beer a "continuing security interest" in certain production equipment, including equipment "purchased by Boston Beer to modernize [HFBC's] No. 2 bottling line." (June 2006 Supplement, Schedule B, p. 3). The Supplement further states: "Except as modified by the foregoing provisions, the Agreement [Production Agreement] and the other contractual arrangements contained therein, as currently in effect, will remain unaffected." (Id. at p. 2).

In December 2007, HFBC and Boston Beer executed another amendment to the Production Agreement. (Boston Beer letter dated December 12, 2007, accepting proposed amendment, "the December 2007 Amendment") ("[T]he existing production agreement between [HFBC] and [Boston Beer] is now amended accordingly."). The December 2007 Amendment covered various matters, including the volume of beer to be produced/purchased during 2008 and 2009. The December 2007 Amendment also detailed certain equipment to be purchased by Boston Beer for HFBC's use, including a piece of equipment called a "Carbo Cooler." The December 2007 Amendment also addressed monies owed by HFBC in connection with equipment purchased by Boston Beer for HFBC's use in connection with Bottling Line No. 2.

In January 2009, the parties executed another amendment to the Production Agreement ("the January 2009 Amendment"). In that regard, Boston Beer wrote to HFBC, concerning monies owed by Boston Beer to HFBC under the Production Agreement for 2008. (Docket No. [#7-7]). Boston Beer proposed a set-off arrangement, pursuant to § 5(d) of the Production Agreement, pursuant to which monies owed to by Boston Beer to HFBC would be offset against monies owed by HFBC to Boston Beer under the equipment leases. Significantly, as part of the proposal, Boston Beer referred to "the Carbo Cooler" as being "subject to the Equipment Lease for Required Additional Equipment." On January 8, 2009, HFBC countersigned the proposal, indicating that it "[a]cknowledged, accepted, and agreed to" the proposal.

In or about February 2009, Plaintiff High Falls Operating Co., LLC ("OpCo") and others executed an Asset Purchase Agreement with HFBC, pursuant to which OpCo purportedly purchased some, but not all, of HFBC's assets and liabilities. In pertinent part, the Asset Purchase Agreement stated that OpCo was not purchasing assets consisting of, inter alia, the ...


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