## Facts

- Ard Dr. Pepper Bottling Co. (Ard) obtained a 1938 license from Dr. Pepper Co. (Dr. Pepper) giving Ard the exclusive right to bottle and sell Dr. Pepper in specified Mississippi counties, and requiring Dr. Pepper to sell syrup to Ard on stated terms.
- The license required Ard to bottle Dr. Pepper using “modern, mechanical, sanitary equipment.”
- Ard also agreed to undertake advertising and other sales efforts and to increase sales to the extent Dr. Pepper required.
- The agreement included a cancellation clause permitting Dr. Pepper to terminate if Ard violated any contract term, and it further provided that Dr. Pepper’s good-faith determination of a violation would control (i.e., be final and conclusive).
- In July 1950—about twelve years into the relationship—Dr. Pepper canceled the license, stating that (1) Ard’s equipment no longer met the contract’s “modern, mechanical, sanitary” standard, and (2) Ard had not carried out required advertising and sales-increase efforts.
- Ard sued for damages, alleging wrongful breach of the bottler’s license.
- At trial, Ard admitted it had spent no money on advertising for a couple of years, explaining that it needed the money to maintain or update its equipment.
- The record also contained evidence that the water Ard used in bottling contained bacteria, and that the condition could have been corrected at relatively modest cost.
- Dr. Pepper presented evidence that it investigated Ard’s operations and communicated with Ard before canceling.
- The district court directed a verdict for Dr. Pepper at the close of the evidence, and Ard appealed, arguing that a jury should decide whether Ard’s performance was satisfactory and whether cancellation was justified.

## Issues

1. Whether a termination clause making the licensor’s good-faith determination of the licensee’s noncompliance “final and conclusive” authorizes termination unless the licensee produces evidence of bad faith, fraud, or arbitrary action.
2. Whether the district court properly directed a verdict for Dr. Pepper rather than submitting to the jury the question of satisfactory performance or breach.

## Decision

- The Fifth Circuit affirmed the judgment entered on a directed verdict for Dr. Pepper.
- The court held that the contract validly assigned to Dr. Pepper the authority to determine, in good faith, whether Ard had violated the agreement’s operational and sales-effort requirements.
- Because the evidence supported Dr. Pepper’s good-faith decision—based on investigation and identified deficiencies—and the record did not present a substantial basis for finding bad faith or fraud, Dr. Pepper’s determination was controlling under the contract.
- Given the contract’s “final and conclusive” determination clause and the absence of a triable dispute on bad faith, the directed verdict was proper.

## Legal Principles

- A contract may allocate to one party the right to decide whether specified performance conditions have been met, including by stating that the party’s determination is “final and conclusive.”
- When the parties make one side’s determination controlling, courts generally enforce that allocation and do not substitute an independent assessment of performance, so long as the deciding party acts honestly and in good faith.
- The limiting check on a “final decision” or “satisfaction/judgment” clause is good faith; proof of dishonesty, fraud, or arbitrary action can prevent enforcement of the clause.
- A directed verdict is appropriate when the contract makes one party’s good-faith determination dispositive and the evidence would not permit a reasonable jury to find bad faith or similar misconduct.

## Conclusion

The Fifth Circuit held that the bottler’s license allowed Dr. Pepper to cancel the agreement based on its own good-faith determination that Ard failed to meet equipment and sales-effort obligations, and because the evidence supported good faith and did not reasonably show fraud or arbitrary conduct, the directed verdict for Dr. Pepper was affirmed.


Ard Dr. Pepper Bottling Co. v. Dr. Pepper Co., 202 F.2d 372 (1953)