6th Circuit Slams Distributor’s Attempt to Transfer Craft Beer Brands Without Brewer’s Consent

It’s a fairly typical clause in most distribution agreements, if not specifically stated in most state beer franchise laws – a promise that your distributor won’t transfer the franchise or the business (you want both and you’ll see why in a second) absent the brewer’s consent (which will not be “unreasonably” withheld).   The 6th Circuit Court of Appeals has handed a resounding win to Great Lakes and Boston Beer in their battle to have a court enforce this exact type of contractual provision in their distribution agreements requiring their former distributor seek their permission and consent in selling its business to a larger national distributor prior to consummating the sale.

You can read the full opinion in Southern Glazer’s v. Great Lakes Brewing Company here.

You can read our prior articles on the case, the briefs, and the oral argument here.

To get you up to speed, here are the facts straight from the recent opinion:

Defendant The Great Lakes Brewing Company sought to end its relationship with one of its distributors, Glazer’s of Ohio, Inc., after it executed a corporate merger without seeking Great Lakes’ consent, as required by their contract. In response, Glazer’s of Ohio’s successor corporation, plaintiff Southern Glazer’s Distributors of Ohio, LLC, filed suit in the United States District Court for the Southern District of Ohio and moved to preliminarily enjoin the impending termination, arguing that the [craft beer distribution] contract’s consent requirement was invalid under Ohio law. The district court agreed and found that the remaining equities weighed in favor of granting the preliminary injunction. The defendant manufacturer [appealed].

In the opinion, the 6th Circuit reversed that District Court’s opinion holding that the consent provision of the distribution contract was valid under Ohio law, so the distributor had “no likelihood of success” on the merits of that claim and the injunction should not have issued.

There were two important provisions in the contract – you can read the beer distribution contract here – as discussed in the recent opinion:

Section 9 deals with “Ownership Changes and Assignments.” In Section 9(a), the parties agreed that Ohio Glazer’s “must obtain [Great Lakes’] prior written consent to any change in . . . ownership.” And in Section 9(d), Great Lakes agreed that “[it] must not unreasonably withhold its consent to an Ownership Change . . . and shall be guided in its decision by its reasonable business judgment.”

In Section 10, the parties set out the conditions under which a party could terminate the franchise agreement. Section 10(b) provides that “[Great Lakes] may initiate the termination of this Agreement for cause at any time if Wholesaler fails to substantially comply with any of its obligations under this Agreement . . . .” Under this provision, Great Lakes must “explain[] the reason(s) for termination” and provide Ohio Glazer’s an opportunity to “cure the deficiencies that justify termination.” In addition, Section 10(c) provides that “[Great Lakes] may also terminate this Agreement for cause immediately upon written notice upon the occurrence of certain causes not subject to cure,” one of which is that Ohio Glazer’s “undertakes an Ownership Change . . . without the written consent required by section 9.”

The distributor argued that because Section 9 went further than the Ohio franchise law in placing requirements on the transfer of the business, it was invalid.  The appellate court rejected this argument holding that, in fact, the contractual provision supplemented the existing franchise rights and that such contractual provisions may go further than what is statutorily mandated so long as they are not proscribed by the statute:

However, plaintiff glosses over what the Franchise Act actually states. Section 1333.84(F) does not, as plaintiff asserts, prohibit a manufacturer from requiring consent with respect to the sale of a distributor’s business. Rather, it contains a very specific proscription. Distilled to its essence, the first clause prohibits manufacturers from “fail[ing] to act in good faith in accordance with reasonable standards for fair dealing[] with respect to” a distributor’s right to sell its business. Ohio Rev. Code § 1333.84(F). The parties’ agreement does not waive that prohibition. Echoing § 1333.84(F)’s “good faith” and “reasonable standards for fair dealing” language, Section 9(d) specifically states that Great Lakes cannot “unreasonably withhold its consent” and must exercise “reasonable business judgement” in deciding whether to consent to a change of ownership. There is no meaningful inconsistency between Section 9 of the franchise agreement and the Franchise Act.

Indeed, far from prohibiting provisions like Section 9, § 1333.84(F) actually anticipates that parties will include such provisions in their written franchise agreements. The fact that § 1333.84(F) requires manufacturers to “act in good faith in accordance with reasonable standards for fair dealing” regarding the sale of a distributor’s business necessarily implies that manufacturers can have a say over the transaction. Otherwise—if the concept of consent in the sale-of-business context were truly prohibited, as plaintiff contends—there would be no reason for the Ohio General Assembly to require manufacturers to act reasonably in that scenario, as it did in the first clause of § 1333.84(F). Simply put, if we accepted plaintiff’s argument, we would render the very statutory provision on which it relies meaningless.

…

However, plaintiff concedes that parties are permitted to bargain for rights and responsibilities in addition to those set out in the Franchise Act, so long as those contractual provisions do not waive the prohibitions of, or fail to comply with, the Act. Appellee Br., p. 34 (stating that “a distributor’s rights are defined by the Franchise Act and any consistent provisions of a franchise agreement” (emphasis added)); see also Bellas Co. v. Pabst Brewing Co., 492 F. App’x 553, 557 (6th Cir. 2012) (“[A]s a rule, nothing prohibits parties from contracting for greater protections than those provided by statute.”). The question in this case—which is separate from what the baseline rights and responsibilities are under the Act—is whether Section 9’s additional consent requirement “waives . . . the prohibition[]” in § 1333.84(F). Ohio Rev. Code § 1333.83. To answer that, we must compare the language of the contractual provision with the language of the Act. And for the reasons stated above, nothing in Section 9 waives the prohibition in § 1333.84(F). It specifically requires the manufacturer to use “reasonable business judgment”—not unlike the “reasonable standards for fair dealing” requirement in § 1333.84(F). Plaintiff’s contrary argument elides the specific language of § 1333.84(F).

….

But simply because another, irrelevant provision in the parties’ contract is invalid does not mean the provision under consideration is also invalid. For one reason, this invalidity-by proximity rationale would render the parties’—indeed, every—contract’s severability clause meaningless.

Frankly, rational thought in contract law and the oral argument left little doubt that this would end up as the result.  If the honest and open interpretation of an agreement negotiated at arm’s length wasn’t clear enough, certainly the judge’s telegraphing their inclinations during the questioning left little doubt that Great Lakes would prevail on these issues.

For now, it’s back to the trial court with the trial set for later this year.

Tips:  For Brewer’s the opinion helps clarify some important considerations in drafting and entering into craft beer distribution agreements:

• Many of your contractual clauses shouldn’t be left out or removed based on arguments from distributors or their attorneys (unsupported by on-point case law) that something “conflicts” with or “isn’t allowed” under a franchise law.   Do they object to the actual rights it would grant you or are they attempting to use the statute as a justification to not include a point they’d rather not argue about?  Given that severability clauses will read out any provisions that do conflict and the law allows people to contract for rights beyond the franchise laws, this opinion shows there’s little reward in just accepting an unsupported “that won’t work under the franchise act” and not including the provisions you’d like.
• Ensure you have the extra franchise/business transfer clause in your agreement mandating a distributor seek your consent prior to transferring either and ensure that if it needs to, it says that consent won’t be unreasonably withheld (you may even want to define what’s reasonable by stating it amounts to the standards that you’ve applied to other distributors in the past 12 months).
• In negotiating and dealing with distributors, realize that the Court tossed the Distributors a bone here through s the Court’s discussion of the compensability of the loss of goodwill a distributor may undergo when one prime brand is lost thereby causing retailers to fail to purchase the other tertiary beers that they may have purchased simply because they were already buying the main beer from a distributor.  If you really are a prime brand, you may have some other considerations contractually that you want to address, like consequential damages, or intangible harms.  You might also seek a recognition in a representation under the agreement that you are a insignificant portion of your distributor’s total sales and that they agree to inform you and prove to you that you are a significant portion if you ever become as much (I know, it stings, but it may prevent intangible damages).