Brewing or Distilling Internationally Could Make More Sense Than Exporting – But You Still Need A Good Contract

The international market for beer, wine and liquor is impressive and worth looking into.  If you’re really planning on exporting larger quantities internationally for a considerable profit, why not save on the transportation costs, increase the shelf life, and not worry about how your glass bottles or crushable aluminum cans are going to hold up in oceanic transit?  This concept isn’t just for international brewing, it applies to choices for expansion with new breweries in regional locations rather than just continually expanding capacity at your flagship location and exporting everywhere.

In a recent article in Craft Business Daily on the Lagunitas brewery expected in Chicago, Tony Magee, Lagunitas’ founder, explained this in terms of exchanging the cost of freight for financing on the new facility… he’s brilliant for making it concrete – at needing to purchase 4 oz of diesel for every 22 oz  beer from California to Chicago, the cost savings in fuel for not having to ship to Chicago can pay for the new brewery in short order.

With emerging economies in India and China expected to offer a considerable market for craft breweries, distilleries – why not contract brew or finance a new facility abroad? 

With any international operation comes a host of international problems.  We’re past the point where anyone might be repeating the same Chevy Nova mistakes in Latin America or something like the Chinese Coca-Cola “bite the wax tadpole”  snafu – (if it had been true).  But workforce negotiations, quality control, the adequacy of facilities and dealing with foreign regulations and regulators can present their own host of particular problems.  Drafting a good contract with your international partners can help protect you from many of these problems.

The adequacy of facilities and the operation of contractual protections arose in India Breweries, Inc. v. Miller Brewing Company which is a breach of contract case brought by India Breweries Inc. against Miller Brewing over the alleged breach of a licensing agreement that governed the parties attempts to achieve the brewing and distribution Miller products in India.  India is an important market.  IBI is a company that wanted to work with Miller to develop the breweries in India – the parties entered into the attached licensing agreement that had an operative provision which is the entire basis for the suit:

With respect to each brewery where a Licensed Beer is to be brewed, IBI (after consultation with and inspection by Miller) will conduct (or cause to be conducted) commercial scale test brews of each Recipe that is to be used at that brewery. Prior to beginning commercial brewing of each Licensed Beer at the brewery in the Territory, IBI will obtain Miller’s written approval of the brewery and the Licensed Beer(s) made at that brewery. As defined herein, “commercial brewing” shall mean production of Licensed Beer(s) for sale. Where brewing is to be performed by a sublicensee or a contract brewer, no such sublicensed or contract brewing-brewing [sic] may take place unless Miller has approved in writing the brewer, the brewery, the confidentiality protection relating thereto, and the terms of the sublicensing/contract brewing relationship. . . .

Over the course of their relationship, Miller visited some breweries in India and rejected them as failing to meet the requirements Miller had established for equipment specifications, facility adequacy and quality control.  Rather than visit every brewery IBI proffered across India, Miller sent IBI a list of required equipment detailing the specifications for facilities.  Of the facilities IBI proffered, none met the Miller specifications and Miller did not travel to inspect any of the inadequate facilities.  The parties agreement expired by its own terms because IBI and Miller never selected a brewery or started brewing, and IBI sued Miller claiming that under the quoted clause, Miller had a duty to inspect any facility that IBI proffered up.

The district court and the Seventh Circuit disagreed with IBI’s interpretation about the plain language of the contractual provision and found that no reasonable reading of the language could be construed as forcing Miller to visit facilities in India simply at IBI’s request.  The Seventh Circuit opinion can be found here.

Drafting a proper licensing agreement, especially an international one, can be a good first step in exploring your international exporting or brewing and distilling options for advancing your business in expanding markets.  Provisions for the inspection of proposed facilities proffered by partners or joint venture cohorts are a good idea but ensuring that nothing is mandatory on your end is an even better one.  With a somewhat definitive interpretation from a circuit court, you’re reasonably assured that a consistent interpretation of the same language in similar circumstances should play out in a similar fashion in the future. 

[Legal Geek End Note: As an added bonus for our readers, here’s a copy of an Indian Memorandum of Understanding that an IBI affiliated entity entered into with an Indian brewer – this is just plain interesting.]