Goro v. Flowers Foods, Inc.

SIMON GORO, an individual; TONY RUSSELL, an individual; REY PENA, an individual; JOSE PENA, an individual; JEFF BELANDER, an individual; and GUISEPPE ZIZZO, an individual, Plaintiffs, v. FLOWERS FOODS, INC., a Georgia corporation; FLOWERS BAKING CO. OF CALIFORNIA, LLC, a California limited liability company; FLOWERS BAKING CO. OF HENDERSON, LLC, a Nevada limited liability company; and DOES 1 through 100, inclusive, Defendants.

No. 17-CV-2580 TWR (JLB)

United States District Court, S.D. California

September 20, 2021

ORDER (1) GRANTING PLAINTIFF TONY RUSSELL'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON DEFENDANTS' FIRST AND THIRTY-SECOND AFFIRMATIVE DEFENSES, AND (2) DENYING WITHOUT PREJUDICE PLAINTIFF'S MOTION TO SEAL (ECF Nos 171, 172)

Honorable Todd W. Robinson United States District Court

Presently before the Court is Plaintiff Tony Russell's Motion for Partial Summary Judgment on Defendants' First and Thirty-Second Affirmative Defenses (“Mot., ” ECF No. 171), as well as the Opposition filed by Defendants Flowers Foods, Inc. (“FF”); Flowers Baking Co. of California, LLC (“FBC California”); and Flowers Baking Co. of Henderson, LLC (“FBC Henderson”) (“Opp'n, ” ECF No. 193) and Mr. Russell's Reply (“Reply, ” ECF No. 195). Also pending before the Court is Mr. Russell's Motion to Seal (“Mot. to Seal, ” ECF No. 172) certain exhibits filed in support of their Motion for Partial Summary Judgment.^[1] The Court held a hearing on September 9 2021. (See ECF No. 205.) Having carefully considered the Parties' arguments and evidence and the law, the Court DENIES WITHOUT PREJUDICE Mr. Russell's Motion to Seal and GRANTS Mr. Russell's Motion for Partial Summary Judgment.

BACKGROUND

I. Material Facts^[2]

A. Defendants' Direct-Store-Delivery System

FF is the second largest producer and marketer of bakery products in the United States. (See ECF No. 171-3 (“Ex. A”) at 2, 4.) FF markets well-recognized brands such as Nature's Own, Dave's Killer Bread, and Wonder. (See id.) In 2017, FF had $ 3.9 billion in sales. (See Id. at 4.) FF advertises to potential investors that it is in the “[r]etail and foodservice” market. (See id.)

FF distributes its products through two segments: a Direct-Store-Delivery (“DSD”) for fresh bakery foods and a Warehouse Delivery segment for others, including snack cakes and frozen products. (See Id. at 2, 5; see also ECF No. 171-4 (“Ex. B”) at 41-42.) The DSD segment accounts for approximately 85 percent of FF's sales, or approximately $3.3 billion in Fiscal Year 2017. (See Ex. A at 2, 4-5.) Under the DSD system, Defendants manufacture products and Distributors, ^[3] like Mr. Russell, deliver them. (See Id. at 2, 5; see also ECF No. 193-1 (“Parmer Decl.”) ¶ 4.) Internally, Defendants acknowledge that “[t]he primary purpose for operating under this model is reduced costs[, s]pecifically, . . . fringe benefits that would be paid to employees of the company versus those costs which become the responsibility of the [Distributor]” and “savings from the maintenance and use of the route vehicles (fuel, etc.).” (See ECF No. 173-4 (“Ex. I”) at 1.)

Publicly, Defendants characterize their use of Distributors as an “independent contractor franchise model, ” which is meant to incentivize Distributors to develop business and generate additional sales within the area to which they own distribution rights. (See Ex. A at 5; see also Parmer Decl. ¶ 4.) Under certain circumstances, Defendants may manage some routes using their employees. (See Ex. I at 1.) Other bakeries also use this distribution model, which was developed in the 1950s. (See Parmer Decl. ¶ 4.) Mr. Russell initially believed that, as a Distributor, he would have the opportunity to increase the value of his territory. (See ECF No. 193-3 (“Ex. 1”) at 36:14-17.)

To purchase distribution rights to a defined geographic territory, a Distributor signs a Distributor Agreement (“DA”). (See Parmer Decl. ¶ 8; see also Ex. I at 1; ECF No. 137-7 (“Ex. L”) (DA between FBC Henderson and Mr. Russell).) Although prospective Distributors may make certain elections under the DA, they are not permitted to make any changes to it. (See ECF No. 173-14 (“Ex. Y”) at 160:15-161:20.) The DA defines the territory that the Distributor may purchase, the products the Distributor is authorized to sell, and the purchase price for those products. (See Parmer Decl. ¶ 9.) Under the terms of the DA, the Distributor is “an independent contractor” that “shall not be controlled by [Defendants] as to the specific details or manner of DISTRIBUTOR's business.” (See Id. (quoting Pl.'s Ex. L “Witnesseth” Section ¶¶ 4, 16.1).) Mr. Russell, for example, testified that he “vaguely understood” that he was entering into an independent contractor relationship with FBC Henderson. (See Ex. 1 at 39:5-17.)

Among other things, the DA also provides that Distributors: may hire others to operate their territory without Defendants' approval, ^[4] (see Parmer Decl. ¶¶ 10(a), 12(a)); may hold other jobs and deliver products for other companies, (see Id. ¶ 10(b); see also Ex. 1 at 147:19-149:24); may sell products not from Defendants, so long as those products do not compete with Defendants' products, (see Parmer Decl. ¶ 10(c)); are not required to abide by a dress code, (see Id. ¶ 10(d)); are expected to provide their own delivery vehicles, (see Id. ¶ 10(e); see also Ex. 1 at 139:16-25); agree to use “commercially reasonable best efforts, ” (see Parmer Decl. ¶ 10(f)); are expected to perform in accordance with “Good Industry Practice, ” (see Id. ¶ 10(g)); and own the distribution rights to Defendants' products in the Distributors' territory. (See Id. ¶ 10(h).) The term “Good Industry Practice” refers to industry customs, which the DA defines as “the standards that have developed and are generally accepted and followed in the baking industry, ” including “adequate fresh supply” of products, “properly rotating” products, and “promptly removing” stale products. (See Id. ¶ 11; see also Ex. Y at 142:20-144:18.) Defendants will repurchase stale product from Distributors up to a “stale cap” or “stale allowance.” (See Parmer Decl. ¶ 20.) As for sales products above the allowance, Distributors may sell them for non-human consumption, donate them to charity, or bear their cost as a business expense. (See id.) The DA, however, explicitly proscribes Distributors from reselling stale product for human consumption to protect Defendants' brands. (See id.)

Defendants contend that, under the DA, Distributors are responsible for operating their own businesses. (See Id. ¶ 12.) According to Defendants, Distributors can decide: how many days a week to work given assistance from hired help, (see Id. ¶ 12(a)); when to start and stop working each day, (see Id. ¶¶ 12(b), (f); see also Ex. 1 at 310:7-311:2); the route taken to service their customers, (see Parmer Decl. ¶ 12(c)); how much time to spend at each retail location, (see Id. ¶ 12(d)); whether and when to take breaks, (see Id. ¶ 12(e)); what vehicle(s) are needed, (see Id. ¶ 12(g)); what products to order for their customers, (see Id. ¶ 12(h)); and, in consultation with their customers, the number of service days required. (See Id. ¶ 12(i); but cf. ECF No. 173-19 (“Ex. DD”) at 191:7-193:23 (Mr. Russell explaining that he works seven days per week and sometimes all day because of customer requirements).) Under this arrangement, Distributors are also responsible for their other business needs, such as insurance, hiring an accountant, etc. (See Parmer Decl. ¶ 12(j).) If a Distributor is unable to operate their territory on a particular day, Defendants may use an employee to cover the route and charge the Distributor for the necessary expenses. (See ECF No. 173-21 (“Ex. JJ”) at 249:15-250:11, 6-7; ECF No. 171-45 (“Thorndike Decl.”) ¶¶ 3-5.)

Distributors sell products they purportedly purchase from Defendants to their customers, and may promote displays, solicit new accounts, recommend new products, and change product pricing, among other things. (See Parmer Decl. ¶ 13.) Distributors may personally service two types of accounts: cash accounts and unauthorized credit accounts. (See Id. ¶ 14.) With cash accounts, the Distributor serves as the primary contact for the customer, accepting payment directly. (See id.) Accordingly, the Distributor may extend credit and set payment terms, but is also bears the risk of non-payment. (See id.) With charge accounts, the Distributor receives credit for their sales following sales transactions at their respective accounts. (See id.) Distributors receive from Defendants approximately 18 percent on average of the Manufacturer's Suggested Retail Price of the products they deliver, which represents their profit (or “margin”) on the products they sell. (See ECF No. 173-8 (“Ex. M”) at 3; see also ECF No. 173-16 (“Ex. AA”) at 82:15-83:25.)

Defendants employ national account representatives to serve as points of contact at the corporate level for larger chain accounts such as Wal-Mart. (See Id. ¶ 15; see also ECF No. 173-3 (“Ex. H”) (Wal-Mart “Supplier Agreement” with “Flowers Bakeries LLC”); ECF No. 173-5 (“Ex. K”) (Sonic Industries Services Inc. and Sonic Capital LLC “Product Agreement” with “Flowers Foods Foodservice Sales, LLC”).) Defendants' top 25 customers account for approximately three-quarters of their revenue, (see ECF No. 173-5 (“Ex. J”) at 3), and those customers decide on the products they will stock, the price to be paid, and the shelf allocation. (See Parmer Decl. ¶ 15; see also ECF No. 173-9 (“Ex. N”) at 10 (“The [Distributor] does not set prices, incentives, or advertising with the reseller.”), 11-12 (same).) Distributors are responsible, however, for establishing a relationship with local store management, who have significant discretion to award opportunities...