The U.S. Court of Appeals for the Eighth Circuit recently reversed a $11.75 million verdict over a jury instruction error, concluding the a state franchise law's community of interest requirement wasn't properly explained to the jury.

In a Friday decision, the three judge panel concluded a new trial was warranted in a dispute over the Missouri's Franchise Act between St. Louis-based liquor distributor Major Brands and German-made herbal liqueur Jägermeister supplier, Mast-Jägermeister US. The appellate court concluded jury instructions at trial didn't adequately define the relevant community of interest requirement, and reversed the multimillion-dollar verdict in favor of Major Brands. Judge James B. Loken authored the opinion and Judges Steven Colloton and Jane Kelly concurred.

"By instructing the jury to consider only whether Major Brands’s investments ‘were substantially specific to the brand(s),’ the instruction failed to require consideration of the distributor’s degree of economic dependence on this particular supplier relationship and whether, if the supplier ended the relationship, the distributor would suffer ‘severe economic consequences,’” Loken said. “To accurately assess whether the community of interest required by Missouri franchise law exists, the inquiry should not be limited to the distributor’s investments in the supplier’s brand."

In Major Brands v. Mast-Jägermeister, Major Brands sued Mast-Jägermeister US (MJUS) and Southern Glazers Wine and Spirits in U.S. District Court for the Eastern District of Missouri for wrongful termination in violation of Missouri franchise law, conspiracy to violate Missouri franchise law and tortious interference with the MJUS-Major Brands franchise relationship. The claims stemmed from MJUS's decision to halt its distribution relationship with Major Brands and enter into an exclusive distributor relationship with Southern Glazers. A $11.75 million jury verdict was upheld by the district court judge.

On appeal, the court considered the defendants' challenges to two jury instructions. Instruction 13 provided that on Major Brand’s claim for violation of the franchise act, the jury’s verdict must be in favor of Major Brands if they believed, among other things, “a written or oral commercial relationship of definite duration or continuing indefinite duration existed between Major Brands and Mast-Jägermeister” and “there was a community of interest ... between Mast-Jägermeister and Major Brands in the marketing of Mast-Jägermeister’s brand(s) of spirits at wholesale, retail, by lease, agreement, or otherwise," the opinion said.

Instruction 14 provided relevant definitions of the term "license" and "community interest," the opinion said.

The court concluded that jury instruction 14 didn’t adequately define the community of interest requirement and that the district court prejudicially erred in instructing the jury on an essential element of a claim. The panel agreed with MJUS that the court failed to instruct the jury to determine whether Major Brands had "made substantial investments not recoverable upon termination," which are the only types of investments that indicate a community of interest. Rather, the jury was only instructed that community of interest means that Major Brands's investments in the Jägermeister brand were "substantially specific to the brand."

Under Missouri law, the supplier/distributor relationship wasn't that of a franchisor-franchisee, the panel said, after considering New Jersey and Wisconsin case law, where both states "similarly define a franchise as requiring a community of interest between franchisor and franchisee.”

The court considered the U.S. Court of Appeals for the Third Circuit's 1995 holding in Cooper Distributing Co. v. Amana Refrigeration, where it developed a two-part test to determine if the community of interest requirement had been met, which outlined that "the distributor’s investments must have been substantially franchise-specific," and "the distributor must have been required to make these investments by the parties' agreement or the nature of the business."

The U.S. Court of Appeals for the Seventh Circuit's 1992 ruling in Frieburg Farm Equipment v. Van Dale, similarly held that community of interest may exist "when a large proportion of an alleged dealer's revenues are derived from the dealership" or "when the allegaed dealer has made sizable investments (in, for example, fixed assets, inventory, advertising, training) specialized in some way to the grantor's goods or services, and hence not fully recoverable upon termination."

Further, in the Eighth Circuit's 2012 ruling in Missouri Beverage Co. v. Shelton Bros., it considered the community-interest requirement and determined that the distributor wasn't required to make and didn't make any sizeable investments particular to the suppier and, therefore, the distributor's investments couldn't be deemed substantially franchise-specific.

"Applying the Cooper or Frieburg standard, we concluded there was no community of interest in the marketing of the supplier’s liquor products because the supplier’s products never exceeded 1.16% of the distributor’s annual sales and the distributor was not required to make, and did not make, any sizeable investments particular to the supplier," Loken said. "By instructing the jury to consider only whether Major Brands’s investments 'were substantially specific to the brand(s),' the instruction failed to require consideration of the distributor’s degree of economic dependence on this particular supplier relationship and whether, if the supplier ended the relationship, the distributor would suffer 'severe economic consequences.'"

The court held that, in order to properly determine whether the requirement exists, the inquiry shouldn't be limited to the distributor's investments in the supplier's brand. It further held that the error affected the defendants' substantial rights because it "misled the jury or had a probable effect on a jury's verdict."

"The parties spent significant time at trial addressing Major Brands’s investments. The incorrect community of interest instruction misstated Missouri law and improperly broadened the scope of Missouri’s statutory definition of a franchise. Moreover, the prejudicial error in instruction 14 had a domino effect on all claims submitted to the jury," Loken said.

Major Brands' attorney, Edward T. Pivin, of Lewis Rice in St. Louis, and the defendants' attorney, Lawrence C. Friedman, of Thompson Coburn in St. Louis, did not immediately respond to requests for comment.