honour's consistent unbroken control in case law from the supreme court and from this circuit shows that as a matter of law and this is a purely legal issue at this point lola liquor is likely to succeed on the merits of its contract clause claim there are two reasons for this which the state argues both of these so i will go with those two elements in turn first of all from a contract last respects of there is no question that we have a contract here the second issue is the contract which your knowledge use that the state can change the rules of the game right no not in this context your honor and  why if you look at the very front page of the agency franchise agreement which is that you are seventy section two talks about how the commission can be changed specifically the third clause of this section says that during the term of this agreement the commission percentage discount rate may be reviewed every three years as provided by law hopefully that clause cites to a specific statute if you look at you are ninety this is the senate bill one ninety three has passed so the language that is struck out is the language that existed at the time lowe entered into the contract with the state and it says the commission percentage rate may be reviewed every three years at the request of either party if the agent concurs the department may adjust the commission rate so a plain reading of the contract shows in connection with the statutory language cited there and shows that the commission rate can only be changed if the agent concurs no agent would ever concur to have its commission rate lowered the state admits that other than one franchisee that went bankrupt and had new owners or something no agent has ever had its commission rate lowered during the term of one of these ten year periods the reason that it can be adjusted in favor of the agent is because prior to the anakin of senate bill one ninety three and the reason our clients bought this liquor store is because they knew that they had a guarantee commission rates and the reason it can be adjusted is because the different liquor stores in the state are not situated the same low liquor is in lower montana which has three thousand people there's no foot traffic there there's cars that drive by but it's not in a you know urban in urban montana context situation and the big difference is that there's two methods that these agency liquor stores can sell alcohol and one is wholesale to bars which and just let me clarify something because i know your honour's are from different states when you go to montana the only places you can buy liquor are at one of these ninety six agency franchise stores or at a bar a century so you'll drive around you'll see these bars in casinos and you can purchase on sale liquor there for consumption on the premises and they also if they choose can sell off sale liquor so all of that liquor though goes through these ninety six agency franchise stores the franchise stores are compelled to sell to these bars at a fixed wholesale cost that is set by the state in contrast for retail sales to the general public they can set whatever price they want so for example you have  agency stores in downtown missoula and in downtown billings in places like that that have significant retail sales and they can set whatever price they want so the reason that these different stores have different arrangements and we're allowed to negotiate with the state and that's really what this is this is a negotiated commission percentage is not set by statute in in toto in part it is but you can read the statute and you will not be able to figure out a way that the liquor got to a sixteen point one four four commission rate it's negotiated and so the purpose of that is to put these more rural stores on a sort of an equal footing with the urban stores because they don't make as much money when they sell wholesale so that they'll never match if low liquor sells the same amount of liquor at wholesale as of missoula store sells  retail the missoula store is going to make significantly more money that's why these are different the montana senate bill your clients are concerned with has an effective date of february this year is that right yes effectively show that euro court the damages your client who sustained in a full blown trial yes and no to some extent the damages that are accruing right now every day since february first we can calculate those however our client's business plan is a wholesale market and they need to determine how to order their business and whether they want to go seek out new customers and when they're selling to these various stores at a fixed rate is it worth it for them to drive from low montana to eastern montana which i would know is they can drive to seattle from lolo quicker than they can drive to eastern montana from well oh so their business is ordered and sort of defined by their commission rate and this potential loss of customers harms the goodwill of the business and this court has  held that in these cases are cited in our brief that loss of good will is irreparable harm or can be irreparable harm hey that i know it's better for your clients to have it the way with the other way but in terms of were evaluating the standards that we're looking at on a plane or in junction right so the court only analyzed that you were likely to lose on the merits right it's a rather cryptic order yes your honor well but let's just say we if we agree that that isn't so clear it would then have to go back to the district court to analyze those other factors that the court didn't get to the other factor so you could still lose right yes your honor and i mean we can't you're not you can't first to go back to the reparable harm issue most court and we don't have you generally analyze that in the first instance well in terms of a violation of a constitutional right most courts hold that the violation of a constitutional right is irreparable harm for the purposes of a preliminary injunction i also think it's worth noting that the state has never argued that we did not meet the other injunction factors and i think the reason for that is pretty simple the balance of the equities obviously tips in the electors favor because the state will not face a hardship merely by living up to its contractual obligations and in contrast there is a significant or massive hardship for local liquor to proceed for an unknown period of time based on a contract that the state is essentially torn up and i would also point out that there's one other so what would be that since there was a condition in there that put you on notice that that discount rate could be changed by the legislature what would be a condition that would survive your constitutional challenge you say in writing to the change so there's a lot of things that have changed including during this legislative session for example the contract says the only place that agency franchise stores can get their liquor is from the state liquor warehouse while there's all these micro distilleries plan no change in the discount rate could ever survive that not unless the agent concurs your honor and i can i point out that in southern california gas there was a general which i really think is controlling the court doesn't need to look much beyond southern california gas and university why a case in the southern california gas case there was a general modification provision like the one in section eleven here that said you know changes to the law may require changes to this agreement by the time that case got here that contract was sixty years old and the court still held that it was not it could not be changed because it went to the central part of the agreement well when you look at the central part of the agreement in that case it was to deliver gas to the city and to the residents of the city this trench coat ordinance in that case was really a collateral issue when you look at this contract the very central term of the entire contract is this commission rate i mean really the contract promises two things the right to sell to buy liquor from the state to sell to bars the public and and the promise of that commission rate it really is the center of the agreement and the reason the contract clause exists your honor and i think the supreme court recognized this in us trust which is also very much controlling here we believe is that if the state could simply change the law and modify its contracts at will it would be an illusory contract because there would be no consideration why would people  if they're not obligated to live up to their expectations this isn't a contract in perpetuity for the purposes of our appeal and right now we're only talking about for the remainder of this ten year term which is also on the front page you know that talks about the agreement so i think your honour's that the state should be held to its agreement based on both the plain language of the agreement and based on u trust and based on southern california gas i'd like to reserve my time  you please the court my name is andy forsyth and i represent the state of montana chris sweeney is here with me and i would like to split my time and give chris some time after i've talked for about seven or eight minutes if that's all right with the court so are you going to be the one to talk about distinguishing them parent of contract found in southern california gas i would be happy to address that ok well i think that's what he seems to say puts the nail in your coffin so yes if you would distinguish that and if you can i would like to hear that so so i think that the we have sort of a competing view of controlling cases we cite and encourage the court to consider energy reserve which is united states supreme court case and they of course urge on you the southern california case the the case i think is distinguishable through  reasonable expectation of the parties to the contract so factors that bear on reasonable expectation of the parties which determines whether there's a substantial breach one of the parties really think the deal they were making was we think this case is easily distinguishable from the southern california case in the supreme court's decision in energy reserve they cite the provision that provided for a possible future change in the law as a consideration in determining the reasonable expectation of the parties similarly in this court and i'd like to mention a case if i may that is a ninth circuit decision but didn't make it into our brief for which i apologize are you i one versus city of berkeley three seventy one fed third eleven thirty seven decided to year after the southern california case and they're the court said looking at the agreement that the private party had with the municipality the city of berkeley had a provision that said this agreement will be modified by future changes in the law and the court said that would be a factor in determining reasonable expectation one of the things that two other factors that the court has noted both the u s supreme court and the ninth circuit in considering reasonable expectation is the length of the contracting relationship and whether the contract involves an area of business that is heavily regulated so in southern california the court made prominent  no actually i believe southern california argued the length of the southern california practice of not having to pay for extra road repair in that case as a factor determining southern california's reasonable expectations the court pointed out that for over fifty years southern california had paid their contract rate despite the fact that their agreement said it would conform to future changes in the law and that gave them a expectation that that term would continue without change but in energy reserve and n r u y one v berkeley united circuit case and then we cite an eleventh circuit includes clear language providing that the terms of the contract can change for future legislation this can determine the reasonable expectation of the parties another sacked or after considering contract language is whether the business is in a heavily regulated environment why can't the state to enforce these changes in the law well i think i mean the first state has a lot more money than the owners of this particular room only located liquor store why not white you know i think that the state to begin with certainly the executive branch feels an obligation to implement and enforce the law as given to it by the legislature and so i'd point out that the and i think an interesting point to make in the argument would be to refer to and we don't have much of a record in the case we're barely into the litigation before it was you know if it was taxes then you would have a very unique executive in montana if it was anxious to collect additional taxes i know these are not taxes right but again why not wait well actually this seems to me that there's got to be some money advantage to the state because what set talking to say in your spain all this money let it getting at they could have just applied it to new or renewed ten year contracts the well the i think the state feels an obligation to implement the legislation because the legislation was not for the purpose of increasing state revenue in fact state money is reduced under this change in the law the state makes less money one sounds like  from this not from this franchisee but from the others so why can't you wait well i can't how having that how long would you have to wait not that long yeah well if we yeah we live to stay in the court below i think we can litigate this out to conclusion pretty quickly and that would be a good thing to do but if i may refer you briefly though to our ninety six and you may not have it before you but this is an exhibit created by the plaintiffs here which shows the effect on the ninety six franchises in montana of the new legislation a key goal of the new legislation was to actually level the discount experience of the various competing franchisees and a quick look at the numbers the play everything the state is paying or forgoing revenue to make the percentage discount the franchisees get was fault is it that it's not equal it's the state enter into all these different contracts right well this is under the old law yeah but it's it's the state's fault and so now someone else has to be harmed because the state says well we want to reach strip at the discounts well the the state agreed well it's the legislature that said yes we will level the playing field among franchisees it was unfair to have such a broad range of discounts looking at this from looking at lowell weicker zone exhibit they had the highest discount in montana among the ninety six franchisees and high volume so under the new approach there discount the spread between what they pay for a case of liquor and what they must sell the case for to a bar or restaurant is going to be much closer or over three years equal those franchises that have about the same volume so that's the purpose of the act it wasn't a jeep revenue generating purpose but is it the  legislature in the state that the law changed well sure they changed the law well it's not like it's not some it's not going to die right here or not it's not you know sometimes you have things that have to go into effect right away because there are some horrible public danger yeah but i think you can understand of the executive branch looking at this as lolo you should be where your competitors in missoula the town next door are not with your special deal i don't think the executive branch feels free to say oh we can simply decide to make an exception of the law for this particular business in the mileage definition of next door well here lolo's only eight or ten miles from missoula so in montana that's that's next door so let me mention unless there's not a question mentioned a couple of points i'd like to raise we're really here to review judge h decision on abuse of discretion standard and he offered one rationale that is in his view plaintiffs are unlikely to succeed on the merits he didn't give us much of an explanation for that but while the law would be novo by this court in reviewing a preliminary injunction order facts would be given deference at least he identified a rule that's a genuine rule and that is a likelihood of success on the merits and in his judgment under the facts of the case  the the two key factors we think make the likelihood of success low are that the contract is very clear in telling this franchisee who's had the contract for two years not the fifty years that southern california gas at very clear in telling them that changes in the law immediately result in changes to the contract the second factor is that this purchaser two years ago in this franchise entered into a i would say not just a heavily regulated business but it totally regulated business in montana there are only ninety six franchises the key benefit to a franchisee isn't the discount rate it's the fact that the number of franchises are strictly limited and so that it is very much in the form of a limited license opportunity to wholesale and retail liquor product and the and i'm going to relinquish the podium in a moment to my colleague chris sweeney but i would like to direct the court's attention to  energy reserve which is the u s supreme court case and allied structural steel supreme court case in energy reserve the court noted that th business was in the sale of natural gas the price of natural gas had been regulated for years and when the regulation changed it was a reasonable expectation of the parties that they would be subject to these changes in regulation you look at the franchise agreement each paragraph in the agreement is followed in parenthesis by a cite to the montana code section that is the source of that term in the agreement everything in the remit is simply a recitation or re phrasing of the statute itself so it can't be a surprise that at the end of the agreement it says you know in clear terms this agreement  change required by a change in months in fact of immediately upon the effective date of such change in law notwithstanding the failure of a party to agree in writing it's really telling these new franchisees who went to  agreement two years ago everything in your agreement is based on a state statute and if the state statute changes so will your agreement i see there are three minutes left i should have been more generous may i ask my colleague kristofferson  first is with respect to the language in the agency franchise agreement i understand the plaintiff's position to be that the modification provisions somehow are inconsistent or in conflict one with one another the modification provision on page one of references the statute and says that the terms of the contract can change with future renewals of the agreement section eleven of the agreement states that the contract will change automatically and immediately to conform to changes in montana law these are not inconsistent nor are they in conflict the modification provision on the first page provides one means to modify the terms of the agreement the modification provision on the section the second point i would make is with respect to contract clause analysis in general we all know that the three prongs of contract analysis first require the finding of a contract the second is a finding of substantial impairment and agency franchise agreement in this case heightened scrutiny applies i think we need to be careful and refine exactly when heightened scrutiny does apply that this court's case of are you one versus berkeley states when the state or government a party to the contract heightened scrutiny only applies to the last element of contract clause analysis that is whether the law was reasonably related to a legitimate government purpose heightened scrutiny heightened scrutiny does not apply to the second element of whether there was a substantial impairment in the first place i think that's very important for one reason energy reserves did not have a government party to the contract but it laid down the rule that says if a party enters into  highly regulated industry and agrees in that agreement that it will be subject to future laws that party cannot immune itself from future laws look like are you i one where you quoted where you are referencing when you were talking what he's looking for that perhaps i will keep talking with we will get back to that i will also say question short let's assume this case comes back in its current standing with no woman or injunction won the city of berkeley three seventy one f three d eleven thirty seven so just and just to sum up the point i am making is the fact that there was not a government party as a party to the agreement an energy reserves is not distinguishing in this case  because this court's decision are you one versus berkeley makes clear that it doesn't matter which party or whether the government is a party with respect to determining if there is a substantial impairment and i think counsel r your honour's as my colleague correctly noted the energy reserves case that they spend the majority of their briefing focusing on was about a contract between private parties it's a very different standard than a contract to which the state is a party  i also i didn't really address the reasonableness issue earlier and i'd like to just address that real quick in the university of hawaii case this court said that impairment is not a reasonable one if the problem sought to be resolved an impairment of the contract existed at the time the contractual obligation was incurred and so what that means is the idea that different stores had different commission rates is somehow justif changing the contract now doesn't make any sense because that was there two years ago that's why the time frame the shorter time frame here supports your case rather than hurts it on the other thing i want to say is they're trying to distinguish case law but i really don't think they can do it as your honor judge callahan mentioned earlier in terms of likelihood of success on the merits that is a purely legal issue that we're not we don't have any disputed facts that's the one thing we agree on it's a purely legal issue and sense one thousand nine hundred seventy seven and neither the supreme court nor this circuit has ever allowed a state entity to impair the obligation of its own contract regardless of a modification provision and this is simply not there's no justification for it here calvin and you to say that not happened in any case that we're aware of sense us trust in one nine hundred seventy seven and the modification provision in southern california gas is really similar to the modification provision in section eleven here but when you look at the end that wasn't good enough for this court and when you look at the modification provision on the front page of the agreement it says the commissioner a can only be changed if the agent concurs if the franchisee can cars why would a franchisee ever concur to have its rate lowered it would not and it's just it's there's no rationale that they've set forth that justifies the impairment they say in their brief and i give them credit that maybe whence you find an impairment you can say well maybe they're going to come up with some justification that's good enough later well that's fine but until they do i think as a matter of law low liquor has met the elements necessary for a problem an injunction healthful doesn't matter in this case that the that the legislature changed the law is opposed to the commission question correctly your honor it's ok to change the dio are because this is a negotiated commission rates and they if the parties agree then by the plain language of the contract it's ok to adjust the commission rate during the term of the contract and not apparently has happened in the past but it's never been adjusted out but that it was the legislature in this case that changed the law and not the department of revenue that promulgated a regulation which would be a more direct impairment of the contract do you think that makes a difference i mean i think your know your honor because if anything i think it helps our case because the plain language of the contract clause says no state shall pass any law on pairing obligation of contract which is exactly what happened here so and when you look at the purpose of the original purpose of the contract clause was to prevent majority tarion tampering with contracts and it actually was aimed at private contracts way back when when the constitution was ratified but it's come to protect public contracts even more for the reasons discussed in us trust and southern california gas that if the state can montana state law and i assume federal commonlaw control over general provisions of contracts and if the government claims it might eventually develop a rationale supporting the justifying impairment of this contract that's fine it can try but it's going to have to clear a hurdle that no government entity has been able to clear in the supreme court or in this circuit since one nine hundred seventy seven for some reason i thought that in southern california aga exact same entity that was the party to the contract the city passed a law that i thought that was the distinguishing feature is that am i wrong in my recollection no it's a draw and you're correct it was municipal ordinance in southern california gas so but it was i think there there's a logical relationship you know it was it had the police power over that issue you know in terms of who could cut trenches  streets so it was exercising its police power over its municipal affairs in the same way that the legislature here is purportedly exercising its police power over the you know department of revenue and tax payers and the