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Two Locks, Inc. v. Kellogg Sales Co.

United States District Court, E.D. New York

December 19, 2014

TWO LOCKS, INC. d/b/a PREMIER SNACK DISTRIBUTORS, Plaintiff,
v.
KELLOGG SALES COMPANY d/b/a KELLOGG SNACKS, Defendants

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[Copyrighted Material Omitted]

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For Plaintiff: David J. Kaufmann, Esq., Kevin M. Shelley, Esq., Of Counsel, Kaufmann, Gildin & Robbins, LLP, New York, NY.

For Defendant: Susan J. Kohlmann, Esq., Jason P. Hipp, Esq., Of Counsel, Jenner & Block LLP, New York, NY.

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MEMORANDUM OF DECISION & ORDER

ARTHUR D. SPATT, United States District Judge.

This cases arises from the attempt by Kellogg Sales Company, d/b/a Kellogg Snacks (the " Defendant" ) to terminate a distribution agreement with Two Locks, Inc., d/b/a Premier Snack Distributors (the " Plaintiff" ).

Presently before the Court is the Plaintiff's motion pursuant to Federal Rule of Civil Procedure (" Fed. R. Civ. P." ) 65 for a preliminary injunction restraining and enjoining the Defendant from (i) terminating the distribution agreement with the Plaintiff; (ii) altering the benefits due to the Plaintiff pursuant to the distribution agreement; (iii) disrupting or interfering with the operations of the Plaintiff's business as a distributor of the Defendant's products; (iv) taking any action adverse to Plaintiff's business interests; and (v) staying the Defendant's notice of termination.

For the reasons set forth below, the Court denies the Plaintiff's motion for a preliminary injunction.

I. BACKGROUND

A. Underlying Facts

1. The Parties

The Defendant is a Delaware corporation with its principal place of business in Battle Creek, Michigan. (Compl. at ¶ 2.) The Defendant manufactures a variety of cookies, crackers, and other snack products, including well-known products such as Keebler crackers, Famous Amos cookies, Cheez-Its, Nutri-Grain Bars, Rice Krispies Treats, and Kashi Granola Bars (Zlam Decl. at ¶ 3.).

The Defendant utilizes different delivery systems to serve retail locations where its products are sold. (Id. ¶ 4.) In some markets, the Defendant uses independent distribution companies to service smaller stores, such as bodegas and specialty stores, which sell its products. (Id.) In particular, the Defendant delivers products from its warehouses to the independent distributors' warehouses, and the independent distributors on its trucks then deliver the Defendant's products to retail stores. (Id.)

The Plaintiff is a New York corporation with its principal places of business in Commack, New York. (Compl. at ¶ 1.) The Plaintiff is an independent distributor, which has been distributing the Defendant's products in the New York metropolitan area since July 2000. (Ceruto Decl. at ¶ 8.) Previously, the Plaintiff had agreements with companies other than the Defendant to distribute snack products, including Stella D'Oro, Tastykake, Popcorn Indiana, Energy Club, Josephine's, and Delacre. (Zahn Decl. at ¶ 7; see also Zahn Decl., Ex. A.) However, on June 30, 2014, when the Defendant sent a notice of termination to the Plaintiff, the only products that the Plaintiff distributed were the Defendant's products. (Ceruto Decl. at ¶ 3.) Currently, the Plaintiff has the largest

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volume of sales of any of the Defendant's U.S. distributors. (Id.) In this regard, the Plaintiff " grosses $15 million [per year] solely from the [distribution] of [the Defendant's] snack products." (Id. at ¶ 6.)

2. The Parties' Negotiations for the 2008 Distribution Agreement

Prior to entering into the 2009 distribution agreement, the parties negotiated distribution agreements with one year terms. (Zahn Decl. at ¶ 9; Ceruto Decl. at ¶ 8.) Each year the agreement in place would expire, and the parties would have to re-negotiate a new contract for the following year. (Id.)

In late 2006, the parties started to negotiate the terms of an agreement that was to take effect in 2008 (the " 2008 Agreement" ). (Ceruto Decl. at ¶ 8.) The terms of Section 2 of the 2008 Agreement relating to the Defendant's termination rights were seriously negotiated by the parties. (Ceruto Decl. at ¶ 8.)

In particular, in an April 8, 2008 email to David J. Kaufmann (" Kaufmann" ), the Plaintiff's counsel, and Marc Ceruto (" Ceruto" ), President of the Plaintiff, Tara Harper (" Harper" ), counsel for the Defendant, responded to comments made by Kaufmann with regard to a February 26, 2008 draft of the 2008 Agreement. (Zahn Decl., Ex. C., at 4-5.) With respect to paragraph 2 of the draft agreement, Kaufmann commented:

The language you added at the end of Paragraph 2 - entitling Kellogg to terminate the agreement after one year - is, frankly, egregious. The understanding we reached was that Premier's renewal rights would be automatic if it annually satisfied certain performance thresholds. The understanding was not that Premier would invest a fortune in its Kellogg operation only to find itself under the constant threat of immediate termination at any time after one year. We at this firm (which, as you know, represents countless numbers of our nation's leading franchisors) have to wonder just how sincere Kellogg's representations are if we reach such a clear understanding regarding automatic renewal in my conference room only to have that right utterly undermined in your draft a month later - and also wonder if Kellogg truly believes that its distributors are best incentivized to exploit the market for Kellogg with the specter of Kellogg taking over that lucrative business for itself once they do.

(Id. at 5.) Harper responded to Kaufmann's comment as follows:

David- I merely referenced the provision that was already in the agreement in section 12, in section 2. We have to preserve the rights to terminate the contract if we go out of this type of business model. We are guaranteeing Premier the first year and then have the 90 day termination thereafter. We can date the contract effective as the date of signature to extend the 12 month period, but that is all we can do at this time. You did not strike the language in section 12, so I am not sure why you are objecting to it in section 2.

(Id.)

In an April 11, 2008 email to Harper and Ceruto, among others, Kaufmann responded: " While we are disappointed that Kellogg will not provide the security of a multi-year agreement that Premier feels it rightfully deserves, we are willing to accept the terms of THIS 2008 agreement, modified as suggested below, due to economic reasons." (Id. at 3.) With regard to Harper's comments on paragraph 2 of the draft 2008 Agreement, Kaufmann stated:

As you suggested, the one year period during which there could be no termination except for cause should commence on date of execution, not January

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1st. Further, Cheri told Marc Ceruto that following said one year period, a change could be effected such that termination could transpire only on 180 days notice (not the current 90 days).

(Id.)

In an April 22, 2008 email to Kaufmann and Ceruto, among others, Harper responded to Kaufmann's comments on paragraph 2 of the draft: " My understanding is that Cheri told Marc that she would check to see if we can offer 180 days, and we can not [sic] . . . . We understand that you want a longer term but in keeping with company policies we have to keep these agreements to a calendar year." (Id. at 2-3.)

In a follow-up email on April 23, 2008 to the same group, Harper added, " As noted in point number 2 below the final document should have changed the term to a calendar year. It was determined by Kellogg that no one can have an agreement that extends beyond a calendar year. As such I should have attached an agreement consistent with the change that I pointed out below." (Id. at 2.)

In an email to Harper on the same day, Kaufmann responded: " It is not that simple. It was Kellogg that offered the full one year term in lieu of a contract which would be terminable only for cause and would automatically renew. Telling Premier on the day of signing that Kellogg has changed its mind and presenting a contract to Premier for its execution incorporating such change . . . is a fundamental breach of ethics[.]"

In an email to Kaufmann on April 24, 2008, Harper responded:

Yes, Premier is one of our largest distributor, however, they are part of a program and there are rules and laws that must be followed. We do not have an evergreen contract, and none of the distribution contracts are terminable only for cause . . . . In recognition of the relationship with Premier, and the fact that they are in a difficult market we have negotiated a contract that we do not negotiate, we have provided terms of assignment which we do not do, and we have extended the notice term to 90 days, as well as softened our non compete language.

(Id. at 1.)

3. The 2008 Distribution Agreement

The 2008 Agreement became effective on April 23, 2008. (Ceruto Decl., Ex. B.) Paragraph 2 of the 2008 Agreement entitled, " Terms of the Agreement," provides:

This Agreement shall become effective as of the date hereof and shall continue for until December 31, 2008 . . . . After December 31, 2008, this [A]greement may be terminated by either party upon ninety (90) days written notice effective on the date set forth in the notice, or until [the agreement] terminates in accordance with paragraph 12 herein.

(Id.)

4. The 2009 Distribution Agreement

On December 19, 2008, Ceruto sent an email to Kaufmann in which he attached the 2008 Agreement and asked, " Please see #2 TERM OF AGREEMENT[.] What do we need to do?" (Ceruto Decl., Ex. C.) On the same day, Ceruto sent an email to Jeff Bunzel (" Bunzel" ), an employee of the ...


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