Three-Tiered System Economically Irrational – So Says Ohio Court

Sometimes you can’t make this stuff up.  Here’s an opinion from the Fifth District Court of Appeals in Ohio in the case of Esber Beverage Company v. The Wine Group.  The opinion upholds a district court’s ruling that under the Ohio Alcoholic Beverage Franchise Act finding that a wine manufacturers justification of wanting to have one distributor for a region in Ohio rather than several distributors wasn’t just cause under OABFA for termination with the plaintiff distributor.

The opinion quotes wholesale from a previous opinion entered before the OABFA codified the rule that economic savings weren’t a just cause for terminating a distribution agreement.  The opinion in Esber acknowledged that this language from the previous opinion was what was intended by the subsequent legislative codification that just cause didn’t mean economic savings.  It’s an acknowledgment that the three-tiered system isn’t meant to be economically efficient and even goes so far as to say “manufacturer beware”:

“[T]he Alcoholic [Beverage] Franchise Act was enacted to provide some protection to local distributors from the vagaries of the marketplace. If manufacturers could cancel franchises simply for business motivations, that protection would become illusory; there would be no need for such a legislative act. A rational manufacturer will never cancel a distributorship unless it feels that the cancellation would be to its profit and advantage. Thus, virtually all cancellations are for “legitimate business reasons,” a fact surely well known to the Ohio legislature. Under a capitalist system of commerce, where a rational businessman always seeks to maximize profits, there is no need for a statute requiring the cancellation of a franchise agreement to be based upon a legitimate business reason. Therefore, just cause must mean something more than a manufacturer’s unilateral determination that it could make more money if a franchise were terminated.”

“Vintners contends, perhaps correctly, that this interpretation of the Act means that a manufacturer could be locked into an unprofitable situation if changing market conditions render its current distribution network inadequate. This may well be. However, the Ohio legislature has determined that this is a business risk which must be assumed by all manufacturers of alcoholic beverages which avail themselves of the rights and privileges of marketing their wares in Ohio. This Court can only interpret the will of the legislature; it cannot pass judgment on the wisdom of its pronouncements.”