Wisconsin SC finds “good cause” isn’t required to terminate wine distribution agreements

The Governor of Wisconsin has a partial veto power that comes from the state constitution which allows for striking portions of bills to create entirely new (and even contrary) legislation from a bill that’s presented. (Wisconsin Cons. Article V, Section 10). Apparently this power was used to such effect that in 1990 the State Constitution was amended to curb the practice of striking individual letters from different words to form new words.

A few years back, in 1999, then Governor Tommy Thompson used this power to alter a bill amending the Wisconsin Fair Dealership Law, intending to eliminate wine distribution agreements from the arrangements considered “dealerships” under the bill. The bill had been introduced to expand the reach of the WFDL to encompass intoxicating liquor dealers. In the original version of the bill, the definition of “intoxicating liquor” from Wisconsin’s alcoholic beverages statute (Wis. Stat. 125.02(8)) was incorporated – this definition includes wine – “vinous liquors.” But after the Governor’s pen was through, the definition in a later section of the bill was changed as follows to eliminate wine from the definition of “intoxicating liquors” in the law thereby excluding those types of agreements:

(2) DEFINITIONS. In this section:

(a) “Intoxicating liquor” has the same meaning given in s. 125.02(8).

(b) “Net revenues” means the gross dollar amount received from the sale of intoxicating liquor minus adjustments for returns, discounts and allowances.

(c) “Wholesaler” has the meaning given in s. 125.02(21).

(d) “Wine “has the meaning given in 125.02(22).

(3) LIABILITY OF TRANSFEREE OF INTOXICATING LIQUOR GRANTOR.

(a) In this subsection:

1. “Goodwill” includes the use of a trademark, trade name, logotype or other commercial symbol, and the use of a variation of a trademark, trade name, logotype, advertisement or other commercial symbol.
2. “Transferee” means a person who acquires any asset or activity of a grantor’s intoxicating liquor business and who uses the goodwill associated with the intoxicating liquor of the grantor.

(b) A transferee shall be bound by each of the grantor’s dealerships with the grantor’s wholesalers and consequently shall be considered a grantor for the purposes of, and shall comply with, the requirements of this chapter.

(4) CHANGE IN OWNERSHIP.

(a) In this subsection, “successor wholesaler” means a wholesaler who succeeds to the management, ownership or control of a wholesaler or wholesaler’s business or any part of a wholesaler’s business by any means including by stock purchase, sale of assets or transfer or assignment of a brand of intoxicating liquor that is the subject of a dealership agreement.

(b) A change in the management, ownership or control of a wholesaler, a wholesaler’s business or any part of a wholesaler’s business is not good cause for a grantor to terminate, cancel, fail to renew or substantially change the competitive circumstances of its dealership with a successor wholesaler if the successor wholesaler meets the grantor’s reasonable and material qualifications for wholesaler applicants in effect at the time of the change. If the successor wholesaler meets the grantor’s reasonable and material qualifications for wholesaler applicants in effect at the time of the change, the successor wholesaler shall succeed to the dealership rights of the predecessor wholesaler and the grantor shall continue to be bound by the dealership.

The amendments were important to those engaged in the trade of intoxicating liquors as the WFDL requires good cause to terminate any relationship which counted as a dealership. So, even if there was no contract, or if a contract was silent as to the burden to terminate a distribution relationship – good cause would be required pursuant to Section 3 of the WFDL (Wis. Stat. 135.03). And the statute (Wis. Stat. 135.03(4)) defines “good cause” as:

(4) “Good cause” means:

(a) Failure by a dealer to comply substantially with essential and reasonable requirements imposed upon the dealer by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on other similarly situated dealers either by their terms or in the manner of their enforcement; or

(b) Bad faith by the dealer in carrying out the terms of the dealership.

The net effect of the veto was that the Governor meant to exclude wine distribution from the types of wholesaler agreements that amounted to dealerships and were subject to the WFDL.

The veto also removed a cross-reference for the definition of “intoxicating liquor” in the statute’s “definitions” section to the alcoholic beverages statutes which would have incorporated wine by reference.

The impact of the veto’s resulting changes and the exclusion of wine from the Wisconsin Fair Dealership Law remained untested until recently in 2015, when Winebow sought to terminate its relationships with Capitol-Husting and L’Eft Bank for wine distribution in Wisconsin. Winebow had no express written agreement with the companies, and, as reported in the recent decision from the Wisconsin Supreme Court in Winebow, Inc. v. Capitol-Husting Co., Inc. and L’Eft Bank Wine Co. Limited (2018) the distributors responded claiming that the WFDL protected them and required “good cause” for Winebow’s termination. Winebow disagreed and filed a declaratory action in federal court, where it won. The distributors appealed to the 7th Circuit and the 7th Circuit issued an opinion referring the specific question “Does the definition of a dealership contained in Wis Stat. 135.02(3)(b) include wine grantor-dealer relationships?” to the Wisconsin Supreme Court  (you can read the opinion here) and  (you can listen to the oral argument here.) Effectively passing the buck to the Wisconsin Supreme Court.

You might ask, what’s the point if the Governor’s veto defined the terms and exempted wine? – Well, the distributors advanced the argument that because that definition occurred outside the “definitions” section of the law and because the definitions section did define “wholesaler” in relation to the alcoholic beverages statute which cross-references that statute’s definition of intoxicating liquor and because that definition does include wine, then the amendment failed to properly exclude wine – so, where the statute defines a “Dealership” as:

(b) A contract or agreement, either expressed or implied, whether oral or written, between 2 or more persons by which a wholesaler, as defined in s. 125.02 (21), is granted the right to sell or distribute intoxicating liquor or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol related to intoxicating liquor. This paragraph does not apply to dealerships described in s. 135.066 (5) (a) and (b).

Then that use of “Wholesaler” along with the subsequent reference to “intoxicating liquor” means the alcoholic beverages statutes definition which includes wine, and not the subsequent definition which should only apply to a few limited exceptions as stated in that specific small section of the WFDL – Wis. Stat. 135.066.

Basically, their argument was that the term used in the rest of the act was different than the term used in a small section of the law.  Never mind that the Governor had specifically deleted the cross-references to the alcoholic beverages statute for the definition of “intoxicating liquors.”

Winebow disagreed and argued that the definition of “intoxicating liquors” in the entire WFDL was that from Wis. Stat. 135.066 and that absent a written agreement requiring “good cause,” there was no statutory requirement under the WFDL for termination wine distribution relationships.

The Wisconsin Supreme Court agreed with Winebow’s interpretation – the non-tortured one where you don’t apply inconsistent definitions of a word to different portions of a statute – noting that even treatises on the Fair Dealership Law and on alcoholic regulation in Wisconsin interpreted the veto as eliminating wine distribution contracts with wine wholesalers from the ambit of the law:

¶ 34 In the over eighteen years since the enactment of the “minus wine” provision, the legislature certainly could have acted to amend the law if it thought the commentators’ understanding was incorrect. However, it did not override the governor’s veto in 1999, and it has remained silent in the intervening years.

¶ 35 As the Seventh Circuit aptly observed in its certification, there is “no express statutory language” supporting the Distributors’ position. See Winebow, 867 F.3d at 869. Cross references to their preferred definition were removed from Wis. Stat. § 135.066 by Governor Thompson’s partial veto. Following that veto, what remains is unambiguous in its effect to exclude wine from the definition of “intoxicating liquor.”

¶ 36 Instead of giving effect to ch. 135’s single definition of “intoxicating liquor,” the Distributors would have the court follow a path through ch. 125 to arrive at their preferred definition. The Distributors’ circuitous route begins at Wis. Stat. § 135.02(3)(b), which references the definition of “wholesaler” from § 125.02(21). Pursuant to § 125.02(21), “ ‘[w]holesaler’ means a person, other than a brewer, brewpub, manufacturer, or rectifier, who sells alcohol beverages to a licensed retailer or to another person who holds a permit to sell alcohol beverages at wholesale.” We are then directed to § 125.02(1), which defines “alcohol beverages” as “fermented malt beverages and intoxicating liquor.” Finally, moving to § 125.02(8), we arrive at the definition of “intoxicating liquor” as including “vinous liquors,” more commonly known as wine.

¶ 37 Our interpretation gives effect to the sole definition of “intoxicating liquor” located in ch. 135, one which is located in a statutory section beneath the heading, “Intoxicating liquor dealerships.” If the court here were to decide that it is acceptable to effectuate a definition from ch. 125 that is not referenced within ch. 135, there would be no clear stopping point to such a practice.

¶ 38 In sum, we conclude that a wine grantor-dealer relationship is not included within the definition of a dealership in Wis. Stat. § 135.02(3)(b). Wisconsin Stat. § 135.066(2) provides the operative definition of “intoxicating liquor” for purposes of Wis. Stat. ch. 135, and such definition explicitly excludes wine.

There were three justices (7 on the Wisconsin Supreme Court, btw.) dissenting from this viewpoint. In their view, if one applied the inclusion method and brought over definitions from the alcoholic beverages statute, then it was clear that the Governor’s intended veto hadn’t worked and that wine was still included, despite his best attempts to exclude it. That is, one vote more and this would have come out the other way, telling the Governor, “nice try.”

So, without a statutory requirement for good cause, best to also exclude such rights from your distribution agreements to ensure you’re not obligating yourself to prove more than what you have to if you decide to terminate an agreement you no longer wish to be a part of.