Brewers Seek Distributor Termination in Ohio Lawsuit That Could Result in Important Legal Interpretation Regarding Beer Distribution Agreements and Franchise Laws

There are a few interesting cases winding their way through the courts in 2017 that will have a large impact on trade practice laws and issues related to the three-tiered system.  One in particular is getting briefed for argument at the 6th Circuit Court of Appeals.

Great Lakes and Boston Beer are involved in a lawsuit in Ohio over termination of their distribution agreements after Southern Glazer’s filed for and won an injunction that prohibits Great Lakes from terminating its relationship with Southern (and forcing Great Lakes to continue selling beer to Southern) following Southern’s combination with Glazer’s last year.

You can find the amended complaint here, along with the opinion regarding the injunction against Great Lakes here – it lays out most of the relevant issues that led to the injunction that Southern received keeping Great Lakes from terminating the beverage distribution agreement.

Boston Beer joined in the matter also looking to terminate its relationship with Southern for reasons similar to Great Lakes.  (here are the Boston Beer distribution agreement and Great Lakes distribution agreement at issue).

Because the District Court entered an injunction, Great Lakes had the ability to file an interlocutory appeal challenging the decision.  This is important as it means the 6th Circuit Court of Appeals will get to consider the major legal issues in the matter without having to wait until a final adjudication in the matter.  Great Lakes recently filed this opening brief in the appellate matter.

So what’s at issue?

Brewers and other franchise grantors will recognize the main contractual and statutory provisions cited in the argument that the brewers were entitled to terminate after Southern and Glazer’s failed to provide them notice of the merger prior to consummating the deal.  

Like many franchise laws, Ohio’s Alcoholic Beverage Franchises Act mandates that a manufacturer offer a distributor a written agreement conforming to the terms the parties have agreed to and also states that any provision in such a written agreement that “waives any of the prohibitions of, or fails to comply with” OABFA becomes void and unenforceable.

Here, the Great Lakes agreement had a provision that expanded on the rights in the OABFA:

Wholesaler must obtain GLBC’s prior written consent to any change in the ownership of Wholesaler (an “Ownership Change”), including: (i) any sale or transfer of more than 20% of the outstanding voting shares in Wholesaler or a change in partnership interests representing more than 20% of the business; (ii) any change, whether one by transaction or a series of transactions, having the practical effect of changing or transferring the power to determine Wholesaler’s business policies; (iii) a sale of all or a significant portion of Wholesaler’s assets; or (iv) a change that would require a Wholesaler’s notification to TTB of a change in ownership under the provisions of 27 C.F.R. § 1.42 or a successor regulation.

This provision expanded on Section 1333.84(F) “Prohibited Acts” which is a provision contained in similar, if not identical fashion, in many alcoholic beverage franchise statutes across the country:

Notwithstanding the terms of any franchise, no manufacturer or distributor engaged in the sale and distribution of alcoholic beverages, or a subsidiary of any such manufacturer, shall: …

(F) Refuse to recognize the rights of surviving partners, shareholders, or heirs and fail to act in good faith in accordance with reasonable standards for fair dealing, with respect to the distributor’s right to sell, assign, transfer or otherwise dispose of the distributor’s business, in all or in part, except that the distributor shall have no right to sell, assign, or transfer the franchise without the prior consent of the manufacturer, who shall not unreasonably withhold the manufacturer’s consent.

The trial court’s determination that the company is appealing was that the contractual provision was called into serious question by Southern and that Southern would likely succeed in challenging the contractual provision under OABFA – Great Lakes takes the opposite view – that this contractual provision is not in conflict with OABFA’s language regarding successor entities.  

This is an important point for statutory construction in this arena as many beer distribution agreements contain terms that expand on the statutory language or provide more definition or agree to conditions that are not expressly prohibited under the franchise laws, but certainly expand or address concepts that are not expressly allowed either.  

For instance, what happens when a beer distribution statutes requires that “reasonable compensation” or “fair value” be paid by a brewer to a distributor for the distribution rights prior to termination of the relationship when the statute does not define “reasonable compensation” or “fair value”?  Are the brewer and the distributor free to agree as to what will be considered “reasonable compensation” or “fair value” contractually?  Or does the fact that the statute doesn’t define the phrase prohibit further definition.  This is another issue, raised in a similar fashion in the brief that Great Lakes asks the Court to decide is their stated agreement to what amounts to “reasonable compensation” within the relationship it is looking to sever.  

The contractual provision at issue:

The parties recognize and agree that it would be extremely difficult to ascertain the actual economic effects, if any, that a termination could have on Wholesaler, as such effects would encompass Wholesaler’s loss of future profits and the fair market value of Wholesaler’s GLBC business as offset by any claims GLBC may possess against Wholesaler, including those arising from a breach of this Agreement. The parties further recognize and agree that the Reasonable Compensation payment represents a good faith estimate of possible damages and is not a penalty.

So the parties’ agreement defined the terms, but the statute does not.  The trial court seemed to think that this meant they could not define the term and that such a provision was therefore invalid.  Great Lakes raises this as an issue as well at the appellate level.

We will certainly be following this matter and keeping you apprised as events unfold.  This notion of being able to expand issues and contractual rights to broaden definitions and provide a sound path through contractual agreement that allows parties to govern their conduct accordingly is an important notion in all franchise states as many of these rules and regulations from the business practices of the 20th century find themselves challenged and irrelevant or even worse, anti-competitive in a 21st century reality.  This is especially true where once small distributors benefitted from protectionist statutes that aided them in dealing with behemoth corporate brewers but the new craft-brewing movement now finds itself hindered and even unfairly prohibited from growing as comparatively gigantic distributors now use those laws to enforce market dominance to keep the craft movement from achieving glory now that the protectionist measures are unfair as applied to small brewers and actually impede growth and success and are no longer necessary given 21st century technology.