support my name is kyle gray and i represent northern bottling an independent exclusive distributor of pepsi products in areas of north and south dakota under a series of exclusive bottling appointments which are we short hand e b a s that were issued over decades this dispute is controlled by two bedrock principles of federal decide area issues like this as to what law the highest court of a state would apply and here it's new york law since all of these the v a s across the country and indeed across the world have new york choice of law clause to send them but the question the is does new york common law apply or the new york u c c and this court has the guidance from the t circuit which in two thousand and five decided an issue on all fours saying that these these contracts because they involve they have service and sales components but the sales are not at all incidental because both it's a sale to get the part of the material from pepsi that then the test d there is do are the sales incidental and that's what the th circuit looked at that there was no way here with to a distributor contract that you could conclude at least as new york looks at its law that the sales are incidental to this kind is the question whether the sales earned so no are whether the services are more than incident and that's that's a good question your honor because the district court got that wrong it relied on the alley say a case that was interpreting a saudi arabian contract that and it said the test is are these services incidental and in fact if you look at both what what the district what the th circuit sat and also what the permute are case which is the original new york case out of the highest court in new york the question is are the sales incidental and in that permit or case what happened was you had a hospital contract where part of that car tracked for surgery was that that blood would be purchased and the court there said well because that sale of blood was really incidental to the overriding part of that contract which was to have surgery it would be incidental and so it was a service contract rather than a sales contract but every other the law that comes out of both the intermediate courts and the highest court of new york the court of appeals all of those talked about these sales have to be incidental and if they are not then a contract is a sales contract not a service contract and then the later jurisprudence the new york courts also talk about the fact that the emphasis is towards sales rather than service because the u c c is a uniform at the purpose behind that act is to require courts to to apply uniform law across lots of different commercial conduct and so that's why when there's a question under new that pepsi took over eighty percent of the market for itself and made no changes in if it forced my program to deal with the fact that the transshipment both all through the country and it eventually worked its way to north dakota in two thousand and fifteen was just a dramatic increase and that's that pepsi did because of what happened in the course of performance of the parties over the years that they were reading a reasonable steps duty into the contract reasonable steps to prevent now obviously you're not going to prevent all of it but it's to put but good faith efforts in and try to prevent it when you know it's happening which which here it's very clear it was and if you go back and look from the very start of these contracts you have the facts that they are exclusive territories and pepsi itself st it went to congress to get a law passed so that it could keep exclusive territories that otherwise were were were producing so much more than they had been earlier and so so much more was was coming out into what the magistrate called grey markets and it sloshed around the grain markets and then was being bought found in the exclusive territories of northern buying were about thirty and these are the tip of the iceberg fights are fine but you it's a general idea of how much trance shipment is going on and then by two thousand and fifteen it was were circa two thousand and five when the th circuit was looking at this issue but it is not enforced in the sense that it doesn't work anymore and that is that is the issue that both is is there cases that are found are only a tip of the iceberg it knew by virtue of the huge numbers of what was being transshipped that there were more cases that were in northern sterrett torrie so it the t t p itself only shows a very small blip of what what is going on that that is a problem for the exclusive that the number of transshipments that you're looking at are only those that were dealt with under the ready e p right no that's not true your honor that's the cases that were found that are discovered under the t v but if you look at the numbers and and they're set out in  deposition they're also in several other places in the record there are just these huge numbers of transcript and that was going around the country and that's who knew it and mr lewis says they were trying to fix this they knew it was a problem where he set out what it was actually should be doing to meet its reasonable steps duty and it simply wasn't doing those issues like having the know your customer program like like increasing the fine and even if you give you see see application here and you argue they have to take reasonable steps don't you have to show that that was the course of dealing that they had to take the in the past they were taking reasonable steps reasonable steps well sure there's all the letters from absolute to its independent bottlers saying look you need to not sell into these other markets you need to not sell to others you know are selling into exclusive territories and pepsi didn't do anything to enforce that for a while and in fact there's some evidence about tokar it had to knock it off but then it backed away and it wouldn't take away its contract to sell its products and so pepsi really knows this was going on and did very little to fix it and you can see from mr lewis's testimony that they knew it was a problem and they were looking at ways to try and fix it but they did not do what our expert mr cook said should have  been the practices that they were following and those are the kind of issues that jury a jury deciding what is reasonable on new york law particularly under the u c c it's very clear that it is the duty of the court is that came down after the briefing here and so i suspect the court probably will want to hear something on that and i'm sorry i just didn't have the clock in front of me ok very well we'll consider that after we hear from  meant enforcement program was not working that's that's just a misstatement that was part of the question that northerners counsel asked and mr lewis did not agree with the statement that the transshipment enforcement program was not working to prevent transshipment addition to that mr lewis testified about the transshipment of horsemen program and the complexity of stopping transshipment specifically in the context of  say both of those things and he was talking specifically about transshipment in the northeast which again has unique characteristics that don't that don't apply here and that's important for another statement that that northern council made which is the suggestion that somehow the transhipped cases that were found in northern territory is just the tip of the iceberg and she referred to you know vast quantities of tranche of product again the vast majority the tranship product is in the northeast not in northern territory and in addition to that the transshipment enforcement policy allows the boggler to have investigators come out and look in the customers in their customer stores as often as they want they can have the investigators come every day to every single store in their territory if they believe that's necessary to find the transshipped product so the idea that somehow there's you know lots and lots of trains shipped product in  that in northern territory that just wasn't found there just no basis for that that's completely contrary to the way the program works it's contrary to the evidence there is no such evidence thanks in addition to and i also want to go back here unlike in the pittsburgh case significantly is that perhaps eco it here too and followed the tranche of an important program to the letter every single complaint that northern submitted was investigated the fines were assessed the investigation costs were assessed the fines were paid over to north or northern witnesses testify that they were satisfied with the enforcement of the program with respect to its complaints  actually the evidence is to the contrary that cooling area ventures or vistar were responsible for any trench of product in northern territory neither there's no evidence that either of those entities transshipped any product into northern territory there is no ultimately ended up in the hands of court marking up transshipped into into northern territory and again it's important to remember that those customers even those three customers they didn't sell the product to c s control but even in spite of that when p p c and pepsico were able through discovery in this case to identify three specific customers as having been sources of material amounts of the product that was ultimately territory they took action p p c suspended sales entirely of the relevant c s used to one of those customers sorry c s t is carbonated soft drinks and cut the sales of those products by fifty percent to the other two and that they did that at a cost to p v c of millions of dollars in what would have been sales legitimate sales to those customers with in p b c is territory they did that they've lost all that money because it was important and it continues to be important for p v c to impress upon its customers that transshipment is not allowed in will be tolerated and by the way p b c was all that money taking these actions against its customers in order took those actions i would also point out that p p c took those actions pursuant to its own internal anti transshipment policy that it put in place in two thousand and ten and it's been in place since then and that policy as we things which apparently mr cook did not recognize says and this was really sort of a theory that the northern seems to develop in its reply brief in front of this court that somehow new york new york doesn't follow the same predominant purpose test as other courts in terms of applying  c to a mix contract that that's just a misreading of the cases and i would point in particular to the fact that what the what the th circuit hears of the th circuit said about new york issue in the pittsburgh case they said under new york law the contract is one for service rather than sales when service predominates and the sale of items is incidental conversely a contract must be considered one for salesman services are merely incidental or collateral to the sale of goods so it that it's the same predominant purpose test what's the product purpose what are the what are the services what are the sales what are the sales in stone collateral for the services stating that in debt case you err on the side of it being a sales contract which new york case that spells that out we've been cited to attend circular we've been cited the federal court in new york what's the best case from the new york courts that would spell out how to handle a case who so not is not a federal case there well i think there's very little actually on that on that particular issue from the state courts of new york  just have the briefs so of course and and all the cases are of course cited there the so but again i don't think you are actually needs to answer that question here because this is not in case where you got a contract and the elizabeth the coca cola bottling company of elizabeth town did if you actually look at those terms which is what you're supposed to do and which by the way the pittsburgh court didn't do it but if the court actually carefully analyze of those terms it's clear that the services are predominant here and in particular i would note that sales are merely incidental because because your honor as as northerns counsel stated in her arguments she said that the essence of this of this of these e v a s is do and that's why the contract contains provisions about you know having a clean and sanitary bottling plant and building more bottling plants if necessary you know if that if the bottlers don't perform that service then all you've got essentially building of plants and then the creation of the product the manufacture the products so that it can be sold and is never easy a that it would be so after it's created i'm sorry your honor would you say is part of the are merely incidental you might have a different conclusion that's why i was wondering if there's any new york case that would spell out exactly what you know i'm not aware of any new york case that said anything different than what the nd circuit said in trying to underwriters what the district court said in old country which is a contract is one for services rather than sales and service predominates and the sale of items incidental a contract may be considered one for sales and services and merely incidental or collateral to the sale are ok frank does it really matter to the ultimate outcome of this case when we apply the u c c or  thank you the only thing that applying the u c c really chain really gets you is that it allows the court to look at the party's course of performance even though the agreement contradict the terms but the important thing is what the parties course the performance shows is that pepsi co in order to get to address transshipment created the tranche of enforcement program so it be better to refrain maybe from conversation and so forth if you could while we are hearing from your opposing counsel and miss gray will we have some problem with the clock so we'll give you two minutes for a bottle of if you'd like to respond yes thank you your honor so i think it's important to recognize that there is new york law on point there's not new york law on the issue or  from the highest court whether new york would apply these contracts or apply the u c c to a distributor contract that the lower courts say that over and over again but the highest court the permian or case has has explained what the test is and the test is whether the sale is incidental as permute or which is a sales act case and then also standard and the question becomes is there enough evidence that pepsi did not behave reasonably and if she just inforcing the t e p is enough  they've allowed the t p as as mr lewis said to not work very well and so it really can't be enough under the question is c's conduct reasonable has it taken reasonable steps to deal with the reality talked about is the problem here and that pepsi that there's a question for the jury whether pepsi has taken reasonable steps to deal with two thousand and fifteen reality and again i would would point heirs towards allowing these kind of cases to be decided by the jury not by the district court acting as essentially as if there's a bench trial and so those are the issues we think that  the court should focus on very well thank you for your argument thank you to both counsel the cases submitted and the court will file an opinion in d