Court properly interprets “reasonableness” requirement in clause common to most beer distribution franchise statutes concerning sales of rights and changes in ownership

Bonanza Beverage took MillerCoors to court over MillerCoors’s attempts to enforce a portion of MillerCoors’s distribution agreement with Bonanza after Bonanza informed MillerCoors that it wanted to sell its rights to distribute MillerCoors to Southern Glazer’s Wine and Spirits but MillerCoors opposed the sale and wanted Breakthru to purchase the rights under the distribution agreement.

Bonanza sought a preliminary injunction to stop MillerCoors from enforcing the provisions of their beer distribution agreement which Bonanza argued violated state law. The provisions of the distribution agreement (you can read the beer distribution agreement here as part of the complaint (scroll to Exhibit 4 page 40)) required that once Bonanza had informed MillerCoors of a proposed sale that it had the option to elect to negotiate exclusively for the rights based on making proper notices for up to 90 days. The distributor didn’t want to tie up its deal for 90 days, so it argued, based on some loose interpretations of Nevada law that a Nevada statute basically invalidated the beer distribution agreement.

The court disagreed for several reasons and correctly refused to grant an injunction to Bonanza. You can read the Court’s opinion in the matter here.

We’ll be discussing two different aspects of the Court’s decision today and tomorrow. Today we’ll start with the important piece of statutory interpretation the Court undertook in this case. The interpretation is premised on a commonplace section of beer franchise laws which found in  beer distribution statutes across many states – the statute at issue in this case was Nevada 597.157(1), it and its sister statutes generally read as follows:

“[a] supplier shall not unreasonably withhold or delay approval of any . . . sale . . . of a wholesaler[,] . . . including the wholesaler’s rights and obligations under the terms of a franchise, whenever a person to be substituted under the terms of the franchise meets the reasonable standards imposed upon the wholesaler.”

There are two applications of reasonableness in this standard language for beer distribution laws that address changes in ownership and a brewer’s right to consent to someone selling off the rights to handle its beer. The first, and often overlooked mention of reasonableness, is that the brewer needs to act reasonably – e.g. cannot be unreasonable, in its actions of withholding or delaying approval. The second deals with the reasonable standards the brewer may look to enforce, or apply in determining whether the proposed new wholesaler is a good fit for the brewer’s brands.

In many disputes over distributors looking to change ownership or sell off distribution rights (and by many, I mean nearly every single distribution fight I’ve seen over this type of provision) beer distributors commonly look to have a court determine solely whether a brewer’s new standards are reasonable, and they always argue for an interpretation of these statutes that reads out the “unreasonable” language – that is, they want to forget the part of these laws that says a brewer cannot unreasonably withhold consent (e.g. that a brewer can withhold consent so long as it’s done reasonably) and seek, by sheer sleight of hand in attempt to ignore that part of these statutes, to have courts read these statutory provisions about beer distribution laws governing the sale of beer distribution rights and franchises, as simply saying that so long as a new wholesaler meets a brewers standards (which must be reasonable) that the brewer has no choice but to approve the sale.

But that’s absolutely not what these statutes say. These statutes say that a brewer cannot be unreasonable in withholding approval if the successor meets those standards – which is another way of saying that even if a successor meets those standards, “a brewer may still withhold consent so long as it’s not done unreasonably.”

In other words, it is not an absolute right. Simply because a successor meets some criteria, a brewer is not obligated to approve. A distributor looking to sell and suing over it would have to show that the successor met the criteria and that in denying the right to sell, a brewer was acting unreasonably (and not simply because the successor met the criteria – that would be tautological and render the statute meaningless).

Despite the fact that such an argument is based on a tautology – that meeting the standards forces a right to sell because denying a sale in the face of a successor that meets the standards is unreasonable – its in essence what the distributor tried to do here. And thankfully, as many courts do, this one saw right through it, holding that “[a]lso unreasonable is Bonanza’s interpretation that a wholesaler’s right to transfer its franchise rights is subject to only one limitation: that the person to be substituted must meet the reasonable standards imposed by the supplier on wholesalers. This interpretation requires the reader to ignore that what the statute prohibits is a supplier ‘unreasonably’ withholding or delaying in giving its consent when the person to be substituted meets the supplier’s ‘reasonable standards’ for wholesalers.”

With clear and concise reasoning the Court provided an interpretation and justification which applies to multiple similarly drafted change in control statutes in beer franchise laws across the country. And that, dear readers, is golden language doing nothing more than reading a statute fairly, and completely. An honest method of statutory interpretation that every brewer should be happy about.

We’ll cover some of the finer points about the arguments the Court accepted and rejected based on this interpretation of the statute in part 2 tomorrow.