Wisconsin court says beer distributors must arbitrate each other over fair value of distribution rights even when they don’t timely file.

Wisconsin is one of several states with a beer franchise law that allows brewers to pull beer distribution rights from one distributor and assign them to another placing the cost of paying for the fair value of those distribution rights squarely with the newly anointed distributor and not with the brewer.

The statute, Wisconsin Stat. §125.33(10) provides:

(b) Except as provided in par. (c) and subject to pars. (d) and (e), a successor wholesaler shall compensate a terminated wholesaler for the fair market value of the terminated wholesaler’s distribution rights to any discontinued brand of fermented malt beverages assumed by the successor wholesaler for the same territory, less any amount paid to the terminated wholesaler by the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit for the discontinued brand. If the terminated wholesaler’s distribution rights to any discontinued brand of fermented malt beverages are divided among 2 or more successor wholesalers, each successor wholesaler shall compensate the terminated wholesaler for the fair market value of the distribution rights to any discontinued brand of fermented malt beverages assumed by that successor wholesaler for the applicable part of the same territory, less any amount paid to the terminated wholesaler by the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit for the discontinued brand. A terminated wholesaler may not receive under this paragraph total compensation from the successor wholesaler and brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit that exceeds the fair market value of the terminated wholesaler’s distribution rights specified under this paragraph.

The forced interaction between new and successor beer wholesalers is subject to four key exceptions, fraudulent conduct/misrepresentation, felony conviction, sales outside a designated territory; and insolvency:

(c) A successor wholesaler is not required to compensate a terminated wholesaler under par. (b) if the terminated wholesaler’s agreement was terminated, cancelled, or not renewed for any of the following reasons:

1. The wholesaler or a principal of the wholesaler engaged in material fraudulent conduct or made substantial misrepresentations in its dealings with the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit or with others regarding any brand of the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit.

2. The wholesaler or a principal of the wholesaler was convicted of, or pleaded no contest to, a felony crime.

3. The wholesaler or a principal of the wholesaler knowingly distributed any brand of the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit outside the territory authorized by the brewer, brewpub, brewer’s agent, brewpub’s agent, or holder of an out-of-state shipper’s permit for distribution of the brand.

4. The wholesaler or a principal of the wholesaler became insolvent or instituted bankruptcy proceedings, dissolved or liquidated the wholesaler’s business, or assigned or attempted to assign the assets of the wholesaler’s business for the benefit of creditors.

If the beer wholesalers cannot agree to a fair market value for the distribution rights, then they’re forced to an expedited arbitration (that’s right a statutorily mandated arbitration – the statute takes away the parties’ rights to a jury trial, to their own determination about whether they want to have a court determine their rights, and forces a 90 day timeframe within which to begin the process and requires an expedited hearing):

(d) If a terminated wholesaler and a successor wholesaler agree to the fair market value of the terminated wholesaler’s distribution rights to any discontinued brand of fermented malt beverages assumed by the successor wholesaler for the same territory, the successor wholesaler shall pay the agreed upon sum to the terminated wholesaler within 30 days of the date on which the parties reach the agreement. If the parties cannot agree on the compensation due to the terminated wholesaler, upon written demand of either party, the parties shall submit their dispute for binding arbitration, subject to ch. 788, under the commercial arbitration rules of the American Arbitration Association if possible or, if not possible, by a nationally recognized arbitration association. The arbitration shall be conducted on an expedited basis to the extent an expedited proceeding is available. The arbitration shall commence within 90 days after the successor wholesaler obtains rights to receive a supply of a brand of fermented malt beverages, that is a discontinued brand of fermented malt beverages, of the terminated wholesaler, unless this time period is extended by mutual agreement of the parties or by the arbitrator. If the arbitrator awards compensation to the terminated wholesaler under this paragraph, the successor wholesaler shall pay the awarded compensation to the terminated wholesaler within 30 days of the date of the arbitrator’s decision. The terminated wholesaler and the successor wholesaler shall each pay an equal share of the costs of arbitration.

In a recent decision regarding some distribution rights to Central Waters Brewing’s beer in parts of Wisconsin, two beer distributors were unable to reach an agreement regarding the fair market value of the beer distribution rights, but they missed the 90 day timeframe in which to demand an arbitration.

The new distributor argued the that the successor distributor failed to timely file the demand for arbitration over the fair market value of the distribution rights. The old distributor argued that by engaging in negotiations that went beyond the 90 days, the new distributor had agreed to extend the date, and also argued that the issue of whether or not the timing had been blown thereby allowing the new distributor to escape arbitration and have their day in court was a matter for the arbitrator to decide.

Oddly, neither party (perhaps not wanting to kill the goose that laid the golden egg) decided to challenge whether this statutorily mandated arbitration was a deprivation of due process – having taken away the right to jury and the right to hear a court determine their dispute absent an agreement to arbitrate. Recognizing this, the Court even noted that they’d agreed the matter was subject to arbitration:

The parties do not dispute that their disagreement over the fair market value of Johnson’s distribution rights is subject to arbitration under WIS. STAT. § 125.33(10). Instead, they dispute whether Johnson timely commenced arbitration and in what forum that dispute should be resolved.

The district court and the appellate court agreed with the terminated wholesaler that the forum question should be answered and not the timeliness questions, and ordered the matter to arbitration, stating that the arbitrator should decide whether the matter was timely submitted to arbitration. Citing Wisconsin Supreme Court precedent on the issue of arbitrability, the appellate court declined to rule that this case was distinguishable from set precedent:

In First Weber Group, Inc. v. Synergy Real Estate Group, LLC, 2015 WI 34, 361 Wis. 2d 496, 860 N.W.2d 498, our supreme court concluded that the question of whether a request for arbitration was timely is to be determined in arbitration and not in the circuit court, unless the parties have agreed otherwise. See id., ¶¶32, 37, 47-49. In concluding that the timeliness of the request should be determined in arbitration, the First Weber court focused on the distinction between substantive and procedural arbitrability. See id., ¶¶34-46. Substantive arbitrability refers to whether the dispute involves a subject matter that parties have contracted to submit to arbitration, and is generally determined by the court. Id., ¶34. Procedural arbitrability refers to “ ‘issues such as whether certain procedures apply to a particular dispute, whether such procedures were followed or excused, and whether unexcused failure to follow procedure avoids the duty to arbitrate.’ ” Id. (quoted source omitted). Procedural arbitrability also includes issues relating to whether prerequisites to an obligation to arbitrate, such as time limits, notice, and other conditions precedent, have been satisfied. Id., ¶37. The First Weber court concluded that issues of procedural arbitrability, including timeliness, “are to be resolved during arbitration, rather than by a court, unless the parties agreed otherwise.” Id.

You can read the opinion about the beer distributors being forced to arbitration over the transfer of the Central Waters Brewing distribution rights from Johnson Distributing, Inc. (now owned by Lee Beverage) to General Beer-Northeast Inc., here (link to General Beer-Northeast, Inc. v. Johnson Distributing, Inc., App. No. 2017AP1288.)

Interestingly, like many beer franchise laws, somehow the statute simply grants and assumes this is something a wholesaler “owns”. Rather than considering that absent a statutory mandate, the brewer would own these rights and would have the value inherent in the brand – especially where a distributor acts as a deliveryman and does nothing to advance sales and does not pay for advertising or other promotions – which are typically activities engaged in solely by the brewer. The brewer creates the brand value, but the state statute takes that value from the brewer and gives it to the wholesaler. To my knowledge, no one has yet contested this as an unlawful taking.

Additionally, like many statutes, the Wisconsin beer statute fails to state how, or under what analysis, there’s a fair value. How that should be calculated. In many instances in business disputes, we utilize the experience and testimony of a certified business evaluator. For some reason beer wholesalers tend to shorthand recognized and judicially approved methods of determining business value (e.g. market value, discounted cash flow, etc.) and pretend as though they’re doing something proper in setting “fair market value” as some multiple of annual sales. I’m convinced this is to get around the cost of actually paying a certified business valuation expert to render an analysis. The problem with doing it the “shorthand” way is that it’s not a scientifically accepted method and shouldn’t be countenanced by a tribunal under proper evidentiary standards as it’s not a scientifically based method. When these matters are forced to private arbitration, the chance to peer into whether a tribunal follows the rules of evidence or bends them for convenience is lost, and the chance for appellate review of such shortcuts is lessened.