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Claim for Breach of Implied Duty of Good Faith and Fair Dealing Arising Out of Termination Allowed to Proceed

A federal court in Nevada declined to dismiss a beer distributor's claim that a brewer had breached the implied duty of good faith and fair dealing in Crown Beverages, Inc. v. Sierra Nevada Brewing Co., 2017 WL 1508486 (D. Nev. Apr. 26, 2017). Plaintiff-distributor Crown sued brewer Sierra Nevada Brewing over a dispute arising out of the parties' distribution agreement that made Crown the exclusive importer and wholesaler of Sierra Nevada products in northern Nevada. Nevada statutes governing liquor suppliers and wholesalers require that a brewer notify a distributor 90 days before terminating an agreement, establish good cause, and provide a 60-day cure period in which the distributor may correct the deficiency. In October 2016, Sierra Nevada sent Crown a letter indicating that it wished to terminate the business relationship due to Crown's alleged "harassment and bullying" of Sierra Nevada's employees. Crown filed suit alleging that Sierra Nevada had violated the statute by attempting to terminate the relationship without good cause and without providing the required notice and cure periods. In November 2016, Sierra Nevada sent a second letter that articulated grounds for the termination and provided the mandatory 60- and 90-day notice and cure periods. The parties later met to discuss Crown's proposal for curing the defaults cited by Sierra Nevada, but Sierra Nevada rejected the cure plan as inadequate.

Crown brought several claims, some of which the court dismissed as duplicative. However, the court allowed the good faith and fair dealing claim to proceed, finding that: (1) Crown's allegation that Sierra Nevada had "unreasonably" rejected its cure plan was sufficient to support a claim; (2) tort liability for breach of the covenant of good faith and fair dealing existed under Nevada law in "rare and exceptional" situations, such as in a franchise relationship where one party is in a superior position; (3) the relationship between a brewer and a distributor is one such situation; and (4) Crown's allegations could support its claim that Sierra Nevada's misconduct could be "grievous and perfidious," which ultimately would be a question of fact.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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