OK Supreme Court strikes down law barring exclusive distribution relationships based on state constitutional right allowing liquor and wine manufacturers to sell to whom they please.
A little bit of background makes this seem like an easy decision given that constitutions, as a general rule, trump statutes.
Oklahoma’s state constitution addresses the alcoholic beverage industry and its operation. Oklahoma used to have a state constitutional clause mandating that alcoholic beverage manufacturers make their products available to all distributors:
“any manufacturer … shall be required to sell such brands … to every licensed wholesale distributor who desires to purchase the same, on the same price basis and without discrimination ….”
In 2018, the state constitution was amended and that provision about “shall sell” was replaced with a new permissive constitutional clause which took out the “shall” and replaced it with “may” intending to allow for the right to set up exclusive arrangements:
“A manufacturer … may sell such brands or kinds of alcoholic beverages to any licensed wholesaler who desires to purchase the same. Provided, if a manufacturer, except a brewer, elects to sell its products to multiple wholesalers, such sales shall be made on the same price basis and without discrimination to each wholesaler.”
This allowed some distributors in OK to sell out to large national outfits – Southern Glazer’s Wine & Spirits and Republic National Distribution which then took most of the major brands on in an exclusive relationship thereby terminating what had been the prior practice of being able to compete as a small distributor because anyone could buy all spirits and wine.
Taking issue with this, the state passed a statute – SB 608 – that was meant to require the top 25 brands to remain “open” so that those manufacturers were required to sell to any distributor that wanted to purchase them:
“Any wine or spirit product that constitutes a top brand, as defined in this section, shall be offered by the manufacturer for sale to every licensed wine and spirits wholesaler who desires to purchase the same on the same price basis and without discrimination or inducements.”
The big distributors took on the state and small distributors and the district court found that the new statute could not contravene the rights granted under the constitution, finding in favor of the large liquor and wine distributors the court ruled the statute granting small distributors the right to purchase the top 25 brands regardless of exclusive arrangements with large distributors was unconstitutional.
The state and small distributors appealed the ruling to the Oklahoma Supreme Court which found in favor of the big liquor distributors holding:
- The plain language of the statute and the constitution are in conflict where the statute’s mandatory “shall” is contravened by the constitutions permissive “may”;
- State constitutional provisions regarding anti-competitive behavior meant to combat monopolies are superseded as they were passed before the new liquor distribution constitutional provisions; and
- Exclusive alcohol distribution agreements are not per se anti-competitive or antitrust violations.
Three of the nine justices dissented from the opinion in two separate opinions noting that the provision requires that an alcoholic beverage manufacturer not discriminate and that this apparently conflicts with the ability to enter into an exclusive arrangement which is by its nature discriminatory because the word “and” is used in the new constitutional provision between the same price basis clause and the non-discrimination clause.
More importantly, the dissent points out that the description given to voters when they were deciding to amend the constitution to enact the new clause on alcohol regulation was misleading at best as it was supposed to help combat monopolies and, in fact, did the opposite, paving the way for two large national distributors to enter the Oklahoma market and crowd out all the little beverage distributors:
“Thus, Oklahoma retailers have only one place to go to purchase any one of these particular top brands, a scenario that is destructive of competition among the “multiple wholesalers” contemplated under Article 28A, § 2, an Article containing as its most fundamental objective the continued viability of the three-tier structure, including a privately-owned and competitive second tier of multiple wholesalers.Under the Majority’s reading, the Legislature is powerless to address this scenario or prevent even more flagrant potential scenarios at the wholesaler tier.”
You can read the Oklahoma Supreme Court’s full opinion on this issues of exclusive distribution agreements in the spirits and wine industry here.
Even better, you can find the whole docket for this alcohol manufacturer distribution and franchise matter case here along with links to all the briefs and other orders and filings.