Winery’s Goodwill Case Changes Game

By Randy Sullivan

adobe_acrobat_icon To download a PDF of the newsletter, click here.

For many companies, goodwill is among their most valuable assets. It’s the accumulated value of years of service to customers, of building your brand, of you reputation for quality.

But in a court of law, the value of goodwill is in the eye of the beholder. And, based on a recent case involving a Central Valley winery, that beholder may be a single judge, not a jury.

Consider the recent case of People ex rel. Dept. of Transp. v. Dry Canyon Enterprises, LLC, (2012) 211 Cal. App. 4th 486. The court ruled that a plaintiff cannot secure a trial on loss of goodwill, unless there was goodwill in existence prior to a taking by the government. In addition, it is the trial judge that makes this determination.

This case stems from wine made by Dry Canyon Enterprises from grapes in Paso Robles and Madera. Specifically, the state condemned a strip of land that was home to 1,466 of the vines grown for the firm’s estate cabernet off of Highway 46 in Paso Robles. The state paid the winery $203,500 for the land and vines. The only issue to be tried was whether the winery was entitled to damages for the loss of goodwill resulting in the loss of the acreage used to grow the estate cabernet.

Ordinarily, a business owner is entitled to a jury trial on the amount of goodwill lost by a government taking. In this case, however, after the plaintiff presented their expert testimony and other evidence on loss of goodwill, the trial court granted a motion for judgment and dismissed the plaintiff’s case ruling that the expert opinion on the loss of goodwill was inadmissible.

The jury was denied the right to rule on whether there was a loss of goodwill.

Plaintiff’s primary hurdle was that the winery had not yet turned a profit and it appears from the decision had only sold a few vintages. In the wine world, it very much appears to have still been in a start-up stage.

On appeal, the court addressed the winery expert’s two methods for calculating the loss of goodwill. The court also recognized that the judge is the gatekeeper on expert opinions. Therefore, in all future cases the damage theory needs to be properly designed for admission.

The first method used by the winery’s expert was the ‘cost to create’ methodology. The court ruled that allowing all of the costs/expenses incurred to develop the business to equate with the value of the business’s goodwill rarely is acceptable.

The court echoed a prior ruling by finding that the ‘cost to create’ method may only be used when there is clear proof of preexisting goodwill, and a total loss of that goodwill. The primary problem with the winery’s expert conclusion here was that the winery had not yet posted a profit. Moreover, in calculating the ‘cost to create,’ the expert used all of the winery’s costs, instead of focusing on the cost associated with developing the vines and the estate cabernet. Since this was a partial taking, the expert needed a more focused approach if the damage theory were to have any chance of being accepted by the trial judge. While this author does not know the underlying business operations well enough for the plaintiff, the ‘cost to create’ valuation method would have had a better chance if the plaintiff had not allocated all the costs of its operations to reach the valuation.

The second theory was the ‘premium pricing’ methodology invented by plaintiff’s expert. The method involved the expert deciding that the estate cabernet wine would “fetch a premium price of $10.62 more per bottle than a hypothetical but inferior” wine grown elsewhere. Then the expert multiplied this figure by the number of bottles that would no longer be produced because of the taking for the next 15 years. The expert did this even though the product had not yet been profitable in the winery’s business. The court found this method entirely speculative and flatly rejected it as a methodology for calculating loss of goodwill.

This case is important because it makes clear the judge is the gatekeeper on damage theories. With more cases and less resources, this gives the court a reason to dismiss a case. It is therefore important that all facets of a case be presented in a compelling fashion. This is even greater in the case of representing a new business that has not shown profits, but may have shown great promise.

The moral of the story is that in any damage case, the damage theory should be thoroughly vetted in advance of trial, because the court is the gatekeeper for your expert’s damage theory. And it’s that beholder’s eye that needs to be convinced by facts, not speculation.

bar

Randy Sullivan, a partner at Patton & Sullivan, specializes in business and real estate litigation. For questions or comments he can be reached at randy@pattonsullivan.com.

Back to Resources