Pepsi Owes Midwest Bottler $3M Over Reimbursements

Law360 (November 21, 2019, 9:13 PM EST) — PepsiCo owes an Iowa-based bottling conglomerate almost $3 million over claims the beverage giant broke its promise to reimburse the bottler after undercutting its prices through deals with national customers like Dollar General, a federal jury in Iowa said Wednesday.

The jury in Des Moines came out almost fully in favor of the Oskaloosa, Iowa-based multistate bottler, collectively called Mahaska, which does business in Iowa, Kansas and Nebraska, after a trial that had started on Nov. 4.

Though the two have worked together for decades, family-owned Mahaska said PepsiCo Inc. has increasingly sought over the past quarter-century to control pricing by dealing with national customers directly and buying up its largest independent bottler in 2009 for billions of dollars.

In 2003, the two reached an understanding regarding Pepsi’s price deals with national customers. Even though Mahaska said these direct deals weren’t technically allowed, the 2003 contract, most relevantly “Paragraph 8” of it, addressed the delicate situation by creating a guarantee that Mahaska wouldn’t be liable for Pepsi-brokered prices that fell below Mahaska’s wholesale rates. For more than a decade Pepsi made reimbursements to Mahaska, the latter said.

The jury found Pepsi didn’t fulfill the reimbursement end of the bargain with regard to Dollar General Corp.’s sales; Pepsi owes Mahaska $2.65 million for the breach, the jury said.

“PepsiCo’s reduction in the national wholesale price of PepsiCo’s products — while it increases the price of [beverage syrup] concentrate [to Mahaska] — is what creates the need for the Paragraph 8 payments, which PepsiCo has breached its obligation to make,” Mahaska had said in filings.

But “PepsiCo, as it has repeatedly admitted, had no right to negotiate prices for PepsiCo products to be sold in the Mahaska territories without Mahaska’s express, written consent, in the first place,” the company added.

A lawyer for Pepsi did not provide a comment but sent court papers showing that the suit had once included multiple antitrust claims that had since been dismissed in Pepsi’s favor.

The same papers also described further context behind Pepsi’s 1990s change in approach to pricing strategy. “PepsiCo’s biggest customers … began demanding that PepsiCo service their needs at a national rather than a local level,” and Pepsi had found itself also on the defensive with regard to rival Coke’s strategic elevation in the 1980s of “a single anchor bottler” and purchase of other bottlers, the Tenth Circuit was quoted as saying in the papers.

A lawyer for Dollar General, which was not a party and did not participate in the trial, declined to comment.

The jury also awarded another $307,000 to Mahaska over withheld reimbursements linked to a different annual promotional program called “Big Bets.” Pepsi allegedly left Mahaska hanging on the deal, which expired in the winter of 2016, and Mahaska said it went out of pocket to keep the deal going on a status quo basis but wasn’t repaid.

PepsiCo didn’t ignore necessary reimbursements on deals with two other dollar store chains, however, the jury said.

PepsiCo had brought counterclaims, though the jury rejected some of those, including a claim that Mahaska had inflated its reimbursement requests. But the jury did find for PepsiCo on its claim that Mahaska interfered with a PepsiCo deal with Arby’s, awarding PepsiCo $24,000 in damages for that.

Though bottler distributors were PepsiCo’s critical partners for most of the 20th century, PepsiCo now directly controls the bottling and distribution of 76% of its sales volume, according to Mahaska.

Mahaska is represented by Lawrence Friedman, Shauna Izadi, James Krause and Jason Friedman of Friedman & Feiger LLP, and Johannes Moorlach of Whitfield & Eddy PLC.

PepsiCo is represented by Robert McCallum, Linda Martin and Thomas Ensign of Freshfields Bruckhaus Deringer LLP, and Spencer Cady of Nyemaster Goode PC.

Dollar General is represented by Scott Wormsley of Bradshaw Fowler Proctor & Fairgrave PC.

The case is Mahaska v. PepsiCo et al., case number 4:16-cv-00114, in the U.S. District Court for the Southern District of Iowa.

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