What does the Illinois Beer Industry Fair Dealing Act say about a distributor assigning my distribution agreement (“selling my brand rights”) to another wholesaler and what recourse does a craft brewer have in that situation?
We’ve written quite a bit over the years about Illinois’ beer franchise statute – the Beer Industry Fair Dealing Act (BIFDA) and lectured ad nausea regarding how this law that was meant to help small distributors against large brewers has now been turned on its head by economic conditions and is a cudgel used by powerful distributors to beat down small brewers. The Illinois legislature has been negligent in not taking up the issue of reform as states like Colorado have where recognition of the history and economic reality of these laws has taken hold and craft brewers have exemptions from such franchise laws and beer distribution law restrictions. After all, the very spirit of these beer and liquor franchise laws was to protect the little guys in the industry against the big guys – but now craft brewers, distillers and small wineries are the little guys and deserve fairness as well.
Recent maneuvers in many states have involved even greater consolidation and sale of beer distributors with the distributors looking to capitalize on potential rights to transfer their major assets – the contracts for distribution of beer – to other distributors for money.
Some state beer franchise laws specifically delineate how this process has to take place and offer rights and recourse to brewers that do not want to see distribution of their beer go to a new distributor that isn’t of their choosing. Many times in these forms of sales, brewers are left out of the loop and distributors simply try to force the issue through litigation or otherwise without attempting to win the approval of a brewer. Given that distribution contracts typically speak to these issues, in addition to state franchise laws (we all remember the Great Lakes and Boston Beer fiasco for distributors in Ohio when the attempt was made to transfer absent consent given specific distribution contract language and beer franchise laws) and that there may be other contracts in place between beer wholesalers and brewers, it is important to gather the plethora of documentation that may govern the relationship between a brewer and a beer wholesaler before making decisions and proceeding once a brewer learns that a beer distributor is looking to transfer its distribution contract to another brewer (thereby effectively attempting to force a craft brewer to undertake services for the distribution of its beer from that successor distributor by assignment of the distribution agreement).
ASIDE ON THE PROPER LEGAL TERMS AND NATURE OF THE TRANSACTION HERE:
Be aware that a beer distributor may try to shorthand the legalities and attempt to argue something about “brand rights” or other intangibles – but that’s not likely the law or the proper legal terminology and transactional language. The law and likely legal transaction is that the beer wholesaler is transferring a contract that they hold. If the new distributor wants to try to get you to renegotiate or enter into a new agreement that’s really only something to be done if you want to go to the new distributor – that’s not a sale of the assets or transfer of the distribution agreement which is what BIFDA discusses – and you can likely press against that issue as well. So understanding the nature of the actual transaction is important – the thing that a distributor holds is a contract, perhaps one that grants exclusive rights, to distribute beer in a territory, and that is what can be transferred under the laws and under BIFDA as an asset provided a distributor follows protocols and meets standards laid out in the act and likely also in the beer distribution agreement between the brewer and the distributor. Anyone faced with such a situation should engage counsel and press to have the legal specifics detailed and the requirements of their agreements and BIFDA met.
In the event a brewery in Illinois is faced with a situation where a distributor is looking to assign the contract for distribution, the brewer, in addition to its specific distribution agreements should also understand what the Illinois Beer Industry Fair Dealing Act says about such a situation.
BIFDA begins by giving a brewer the right to immediately terminate without notice for the failure to abide by BIFDA’s terms:
(815 ILCS 720/3) (from Ch. 43, par. 303)
Sec. 3. Termination and notice of cancellation.
(1) Except as provided in subsection (3) of this Section, no brewer or beer wholesaler may cancel, fail to renew, or otherwise terminate an agreement unless the brewer or wholesaler furnishes prior notification to the affected party in accordance with subsection (2).
(3) A brewer may cancel, fail to renew, or otherwise terminate an agreement without furnishing any prior notification for any of the following reasons:
(A) Wholesaler’s failure to pay any account when due and upon demand by the brewer for such payment, in accordance with agreed payment terms.
(B) Wholesaler’s assignment for the benefit of creditors, or similar disposition, of substantially all of the assets of such party’s business.
(C) Insolvency of wholesaler, or the institution of proceedings in bankruptcy by or against the wholesaler.
(D) Dissolution or liquidation of the wholesaler.
(E) Wholesaler’s conviction of, or plea of guilty or no contest, to a charge of violating a law or regulation, in this State which materially and adversely affects the ability of either party to continue to sell beer in this State, or the revocation or suspension of a license or permit to sell beer in this State.
(F) Any attempted transfer of business assets of the wholesaler, voting stock of the wholesaler, voting stock of any parent corporation of the wholesaler, or any change in the beneficial ownership or control of any entity without obtaining the prior consent or approval as provided for under Section 6 unless the brewer neither approves, consents to, nor objects to the transfer within 60 days after receiving all requested information from the wholesaler regarding the proposed purchase, in which event the brewer shall be deemed to have consented to the proposed transaction.
(G) Fraudulent conduct by the wholesaler in its dealings with the brewer.
Note here that obtaining the prior consent or approval is necessary. A real question about the transaction arises – have the distributors already entered into a deal attempting to transfer the assets? Meaning – has the transferring beer wholesaler sought consent or approval beforehand? Many distribution rights transfers occur on a basis where a deal is inked but the distributors then pay a price based on brands that transfer thinking they are in compliance with Section 3(3)(F), but there is an open and honest question about such a method and whether the attempted transfer has occurred under the terms of that deal agreement. Brewers looking to challenge and potentially terminate in a situation should not concede this point and should press the issue about what the distributors have already agreed to as the argument remains about whether inking the deal regarding sale of the distribution contracts amounts to a violation of BIFDA Section 3(3)(F).
Additionally. Note that there is a 60 day time limit running under this section which means that upon receiving notice of a desire to transfer (assuming the transfer hasn’t already taken place) a brewer should be ready to demand information about the proposed assignee, its operations, sales, staffing, capabilities, etc.
Section 3 is tied to Section 6 which says:
(815 ILCS 720/6) (from Ch. 43, par. 306)
Sec. 6. Transfer of business assets or stock. (1) No brewer shall unreasonably withhold or delay its approval of any assignment, sale or transfer of the stock of a wholesaler or all or any portion of a wholesaler’s assets, wholesaler’s voting stock, the voting stock of any parent corporation, or the beneficial ownership or control of any other entity owning or controlling wholesaler, including the wholesaler’s rights and obligations under the terms of an agreement whenever the person or persons to be substituted meet reasonable standards. Upon the death of one of the partners of a partnership operating the business of a wholesaler, no brewer shall deny the surviving partner or partners of such partnership the right to become a successor-in-interest to the agreement between the brewer and such partnership, provided that the survivor has been active in the management of the partnership and is otherwise capable of carrying on the business of the partnership.
Now you can see right away there is a language problem here and an honest question about how the contract and rights under the contract will play into this becomes a serious point of contention as the Section 6 transfer provision uses the language “rights and obligations under the terms of an agreement” which doesn’t necessarily preempt or contravene a “no assignment” clause in a beer distribution agreement and certainly doesn’t preclude further standards and rights regarding such a transfer and “reasonable standards” from being delineated by agreement or otherwise.
Other issues in this vein about Section 6 also include the use of the standard “unreasonably withhold or delay”.
Remember this is all subject to the standards and rights set forth, again in Section 3 and additionally, potentially in the beer distribution agreement between the parties and any other documentation that may exist between them.
One thing to be aware of in this is that utilizing the right to review and approve as some form of bargaining tool is proscribed under Section 5(15) of the Act, which says that no brewer shall:
(15) Coerce or attempt to coerce a transferring wholesaler to sign a renewal agreement, replacement agreement, or an amendment to an agreement by threatening to refuse to approve or delay issuing an approval for the sale or transfer of a wholesaler’s business.
Additionally, remember that strict compliance with the timing and termination rights is necessary if you are going to have an argument as a brewer that you properly terminated not in violation of BIFDA to attempt to avoid paying “reasonable compensation” under Section 7 and to avoid the potential for a determination that a lawsuit was properly brought under Section 9(1) of the act opening the way for attorneys fees or other rights or remedies.
There are real and honest business questions and determinations to be made about how to proceed when a brewer receives notification of the desire to sell. Acting with some expediency is necessary given the timing requirements. Other options such as determining whether a buy-out or transfer or sale to another distributor may be a potential option also require analysis and quick action.
In all likelihood, the decision for a craft brewer to terminate if they believe their agreement or BIFDA hasn’t been satisfied is a hard one as these disputes are likely going to involve litigation and litigation is costly and big beer distributors have much deeper pockets than small brewers. Again the “cudgel” that these beer franchise statutes provide large distributors against small brewers.