Nevada Case Questions How Egregious Distributor Behavior Has To Be To Amount To Good Cause For Termination of Franchise Rights

Franchise laws enslaving brewers to distributors often have vaguely worded “good cause” terms allowing a brewer to terminate a relationship when this beneficently named justification exists.

A frequent criticism of these statutes is that when a distributor has acted in a fashion that would allow for termination under regular contract principles, these laws force brewers to undergo costly litigation just to get a fair shake and rid themselves of a detrimental or poorly performing relationship.

In an interesting example involving allegedly horrendous behavior, Sierra Nevada is currently involved in just such a termination fight in Nevada where it is looking to terminate a distribution relationship for good cause that, amongst other justifications, involves assertions of bullying and threatening behavior on the part of the distributor.

In this case, the opposition Sierra Nevada filed to a motion for a preliminary injunction (without the exhibits) can be read here.  In short, in addition to performance grounds asserted as good cause, the response, through deposition testimony claims that the distributor has created a “poisoned” environment that is unsafe for Sierra Nevada employees.

From the introduction to the motion:

First and foremost, Sierra Nevada cannot in good conscious send its employees to Crown because it has an unsafe, intolerable work environment. Almost three years ago, Sierra Nevada asked Crown’s president … to quit intimidating Sierra Nevada’s employees and to ensure Crown has no firearms present at meetings. Sierra Nevada employees observed [the president] intoxicated and firearms on Crown’s premises. In that dangerous environment, he would berate them and others with vulgar, hostile language, often in response to Sierra Nevada’s concerns about negative feedback from the market on Crown’s poor performance. His own loyal people reluctantly admitted that they have seen him drink during business hours and heard him holler obscenities at people like “I am going to make your ass bleed” and tell racist jokes. They have also seen him yell and swear at Sierra Nevada employees … who work tirelessly in Crown’s market to improve Sierra Nevada sales. Other beer suppliers and retailers have had similar problems at Crown, characterizing [the president] as “toxic” and “volatile.”

The introduction explaining the grounds for termination – Good Cause – includes assertions of poor performance as well, but the main tract – a salacious indictment of the conduct of the distributor through its president – which tends to damage the relationship and reputation of the brewer in the marketplace, if proven, is a classic case of the restrictions emplaced by franchise laws forcing brewers to endure and suffer at the hands of the legal system when in any other industry, they would be free to terminate their contract for this offensive and egregious behavior without having to jump through multiple statutory hoops.

This is likely not a matter to look to hang your hat on for justification in a termination dispute as it is very much a “worst case scenario” factual pattern.  But, if it eventually results in a termination sanctioned for “good cause” it could provide some valuable parameters (albeit the outer limits) in assessing future termination disputes.

For a bonus feature, in case you ever wanted to view a 1986 Sierra Nevada Distribution Agreement,  you can check out the exhibits to the complaint removed to federal court from state court here.