Mississippi Supreme Court invalidates distribution agreement provision requiring sale to Anheuser’s chosen successor under Beer Industry Fair Dealing Act. BONUS: We’ve got the beverage distribution agreement for you and other docs.
This case involves a dispute between a beer wholesaler that wanted to sell its rights to distribute Anheuser’s beer to a chosen buyer. A dispute arose because the beer distributor had a provision in its beer wholesale agreement with the brewer allowing the brewer to assume the right to the sale and appoint a buyer on the same terms (to direct the sale of the beer distributor’s franchise rights). The brewer wanted the beer wholesaler to sell the rights to distribute the beer to a different wholesaler and forced the sale under the beer distribution agreement’s terms.
When that sale happened to the other “brewer chosen” beer wholesaler, Yuengling’s brand and distribution did not transfer and the beer wholesaler sued Anheuser alleging it lost close to $3 Million on account of the failure to transfer the Yuengling brand from Rex Distributing (the selling beer distributor) to Mitchell Beverage (Anheuser’s chosen beer distributor). Rex brought suit under various theories, but the important one is that the right to redirect contained in the Anheuser-Busch beer distribution agreement violated the Mississippi Beer Industry Fair Dealing Act. The District Court found in favor of Anheuser on a motion to dismiss holding that the provision was valid and Anheuser did not interfere with Rex’s business. Rex appealed and the Mississippi Supreme Court reversed that determination holding that the provision violated BIFDA.
With regard to a beer distributor’s right to pass on their business, the Mississippi Beer Industry Fair Dealing Act limits interference:
(2) The supplier shall not interfere with, prevent or unreasonably delay the transfer of the wholesaler’s business, including an assignment of wholesaler’s rights under the agreement, if the proposed transferee is a designated member, or if the transferee other than a designated member meets such nondiscriminatory, material and reasonable qualifications and standards required by the supplier for similarly situated wholesalers. Where the transferee is other than a designated member, the supplier may in good faith and for good cause related to the reasonable qualifications refuse to accept the transfer of the wholesaler’s business or the assignment of the wholesaler’s rights under the agreement.
In this case, the relevant provision at issue read:
4. Ownership of Wholesaler
Although this is a personal service agreement and the participation of Manager is vital to both parties, the ownership of Wholesaler is also important because it is the owner or owners who have the right to establish basic policies and have the responsibility of providing financing, personnel, equipment and facilities for the effective operation of the business …. Therefore, because the participation of the owner(s) could also have a significant effect on the sale of Anheuser-Busch Products and the performance of this Agreement, the parties agree as follows:
(a) Unless Wholesaler shall have followed the procedures set forth in subparagraphs (b) and (c) below, this Agreement shall immediately terminate pursuant to the terms of paragraph 6 whenever there is a change of ownership in Wholesaler’s business ….
(b) A change of ownership of Wholesaler’s business is a matter of vital concern to both Anheuser-Busch and Wholesaler. Anheuser-Busch recognizes Wholesaler’s desire to obtain the best available price for its business. Wholesaler understands that the ability of Anheuser-Busch to successfully market its Products in the Territory is dependent upon the financial, marketing and other qualifications of the prospective purchaser of Wholesaler’s business. The parties acknowledge that these objectives are not mutually exclusive and recognizing Wholesale’s desire to obtain the best available price for Wholesaler’s business from a purchaser who is fully qualified to market the Products and fulfill the obligations set forth in this Agreement, they agree that the following provisions are necessary and desirable for both Wholesaler and Anheuser-Busch:
(i) If an owner of Wholesaler desires to sell, transfer or otherwise dispose of any interest in Wholesaler, then Wholesaler shall notify Anheuser-Busch by submitting a Notice of Intent to Sell … prior to the commencement of any negotiations or related discussions with any prospective purchaser or other third party …. Wholesaler shall cooperate with Anheuser-Busch and provide it with such information as Anheuser-Busch may require in order to extend an offer to purchase such interest in the business. If such discussions result in an agreement between Wholesaler and Anheuser-Busch, the parties shall promptly effectuate such agreement.
(iv) In determining whether to approve or disapprove, as the case may be, a proposed purchaser of an ownership interest in Wholesaler’s business, Anheuser-Busch shall be concerned with the qualifications of the proposed purchaser to fulfill the obligations of this Agreement and the effects of the resulting business combination, including but not limited to, the resulting Territory configuration (if the proposed purchaser is already an Anheuser-Busch wholesaler) and the potential advantages and disadvantages of market combinations. In evaluating the proposed owner’s qualifications, Anheuser-Busch may consider such factors as it deems appropriate ….
(v) If Anheuser-Busch disapproves a proposed owner in Wholesaler’s business solely because of (A) concern with the resulting Territory configuration or (B) market combinations to achieve economies of scale or enhanced sales opportunities, and if a sale is eventually completed to a party preferred and designated by Anheuser-Busch, then Anheuser-Busch shall ensure that the selling Wholesaler receives the same price, net of taxes, Wholesaler would have received from the disapproved purchaser.
(d) At any time prior to the date on which Anheuser-Busch approves or disapproves a proposed transfer of an ownership interest in Wholesaler’s business, Anheuser-Busch shall have the right and option to purchase this ownership interest at the price and on the terms and conditions applicable to such proposed change, subject to the following:
(ii) Anheuser-Busch shall exercise its rights to purchase such ownership interest under this subparagraph 4(d) by notifying Wholesaler in writing. Subject to subparagraph 4(d)(iii) below, upon receipt of such notice Wholesaler agrees to promptly execute such documents and take such actions as may reasonably be required to transfer such ownership as contemplated herein.
(iv) After notifying Wholesaler that Anheuser-Busch intends to exercise its right to purchase such ownership interest of Wholesaler in accordance with this subparagraph 4(d), Anheuser-Busch may assign such right to any third party selected by Anheuser-Busch, so long as Anheuser-Busch (A) assigns this right to a third party legally qualified to purchase and operate the business of Wholesaler under the laws of the applicable State, and (B) remains liable to Wholesaler for payment of the purchase price, if such third party violates its obligation to pay such purchase price to Wholesaler.
Through no small feat of linguistic gymnastics, the Court short-circuited the arguments in favor of the brewer and found that a provision directing the distributor’s sale in the beer distribution agreement amounted to “interference” – the very thing prohibited by the Beer Industry Fair Dealing Act. This holding allowed the Court to invalidate the meet and hold provision wholesale.
The Court also reversed the dismissal of the subsequent purchasing beer wholesaler – Mitchell – finding that Mitchell’s mere acceptance of the sale proposed by Anhueser amounted to an “assent” which meant Mitchell could be sued for tortious interference – based solely on the logical reduction that a sale could not have occurred without Mitchell. As the dissent points out, this fails to meet the actual standard of the requirements for tortious interference.
The dissent, btw, is worth the read as it appears someone decided to do the hard thinking on what amounts to tortious interference and interpreting the word “interfere.”
Unfortunately, this came out against the brewer, thereby likely wholesale invalidating similar provisions in every beer distribution agreement entered into in Mississippi and creating some dangerous precedent for wielding the sword of the word “interfere” in successor distributorship arrangements in Mississippi.
You can find the appendix on appeal with the complaints and transcripts and other documents related to this lawsuit between the beer distributor and the brewer here.