Is Having A Middle-tier Supplier a Way Around BIFDA?

It’s an Illinois Beer Industry Fair Dealing Act Thursday here at Libation and when we reached into the BIFDA barrel, we came out with another interesting successor brewer decision.  But this one’s from the 7th Circuit Court of Appeals in 1993.  

In Shestokas Distributing, Inc. v. Hornell Brewing Company, Inc., Shestokas sued Hornell under the Beer Industry Fair Dealing Act when Hornell became the supplier of “Midnight Dragon”.  Shestokas had previously been the distributor for Midnight Dragon in and around Chicago and had had a contract with the previous supplier of Midnight Dragon, Hudepohl-Schoenling.  The owner of Midnight Dragon, United Beer Distributing Company, terminated the supply contract it had with Hudepohl and gave a contract for supplying the Dragon to Hornell.  United’s termination of the agreement with Hudepohl effectively terminated Hudepohl’s agreement with Shestokas because Hudepohl could no longer provide Midnight Dragon and because the agreement between Hudepohl and Shestokas had a provision stating that the agreement would terminate if Hudepohl were no longer United’s appointed supplier.  United’s agreement with Hudepohl had it’s own important provision – it stated that neither part was allowed to act on behalf of the other in any manner.

Shestokas sued Hornell claiming that under BIFDA, Hornell was the “successor brewer” to Hudepohl.  Back in 1993 the definition was a little different than it is today.  It read that successor brewer:

“means any person who obtains the right of a brewer or master distributor to manufacture or distribute a brand or brands of beer whether by merger, purchase of corporate shares, purchase of assets, or any other arrangement”

Today it reads:

“means any person who in any way obtains the distribution rights that a brewer, non-resident dealer, foreign importer, or master distributor once had to manufacture or distribute a brand or brands of beer whether by merger, purchase of corporate shares, purchase of assets, or any other arrangement, including but not limited to any arrangements transferring the ownership or control of the trademark, brand or name of the brand.”

The Court found that Hornell was not a successor brewer, since United cancelled the contract and selected the new supplier, there was no transfer between Hudepohl and Hornell and the requirements for “successor brewer” status were not met because nothing was exchanged between Hudepohl and Hornell.

What’s really worth noting is that Shestokas raised the argument that maintaining corporate formalities and having an intermediary like Hudepohl or Hornell allows an owner like United to cancel the contracts and basically avoid BIFDA liability with the end wholesaler/distributor in Illinois where BIFDA applies:

“Shestokas submits that the legislature included the provision in part to prevent those who are considered “brewers” under the Act from circumventing the notice requirement merely by transferring their distribution rights to another company. Otherwise, Shestokas argues, a company could circumvent the Act simply by setting up a shell corporation to which it could assign its distribution rights–which, according to Shestokas, is essentially what took place in this case.”

The Court addressed this argument and noted that Shestokas was right:

“The Act states that the replacement distributor is a “successor brewer” only if it obtains the previous distributor’s rights “by merger, purchase of corporate shares, purchase of assets, or any other arrangement.” Thus, the statutory language confirms Shestokas’ observations on one of the purposes of the provision; the language does prevent companies from circumventing the Act’s notice requirement by means of corporate formalities.”

The Court went on to note that there was no allegation here that this was an attempt to avoid the act through corporate formalities, so the point wasn’t further addressed, but the import is clear.  As we saw in our previous posting on the issue – the type of transfer makes a world of difference when it comes to classification as a successor brewer.