Court finds leaving a territory for 13 years might not be enough to accomplish termination of a beer distribution agreement – but sales and transfer of title outside the state may preclude beer franchise statute application

In or around September 2018, Defendant attempted to terminate Plaintiff’s exclusive distribution rights for Zubr in Connecticut by providing a “formal notice of termination to [Plaintiff] regarding its distribution rights for Zubr” and selling Zubr to a new distributor, Arko. (Id. ¶¶ 23, 26.) However, this attempt was unsuccessful. (Id. ¶ 24.) On September 24, 2019, the State of Connecticut, Department of Consumer Protection issued a Memorandum of Decision finding that:

(i) Even though KP had withdrawn Zubr from the United States market in 2005, [Plaintiff] had not relinquished its distribution [*5]  rights; (ii) [the] Zubr Brand product distributed by [Plaintiff] was the same as that imported by [Defendant]; and (iii) [Defendant] did not have just and sufficient cause to terminate [Plaintiff’s] exclusive distribution rights for the Zubr Brand in the State of Connecticut.

(Id. ¶ 24.) Thus, Plaintiff remained the “duly registered distributor” of Zubr in Connecticut. (Id.) And, in September 2018, Defendant terminated Plaintiff’s distribution rights in New York and New Jersey by appointing two new exclusive distributors for Zubr. (Id. ¶ 25.) Defendant did not provide a formal notice of termination to Plaintiff. (Id. ¶ 26.)

(Citations to the Complaint)

Generally, the law requires that distribution agreements be in writing and prohibits the termination and material modification of such agreements [*8]  without “good cause.” Id. § 55-c(3). “Good cause” termination and modification of an agreement is limited to two instances: “(i) the implementation by a brewer of a national or regional policy of consolidation that is reasonable, nondiscriminatory, and essential, and (ii) the failure to comply with a material term of the distribution agreement after notice and an opportunity to cure.” Molson, No. 05CV3984, 2005 U.S. Dist. LEXIS 42973, 2005 WL 2977767, at *4 (citing ABC § 55-c(2)(e)). However, a brewer or wholesaler may also terminate or otherwise modify an agreement if either party “takes any action which would provide grounds for immediate termination pursuant to the reasonable terms of a written enforceable agreement between them,” or “in the event the brewer and beer wholesaler voluntarily agree in writing to terminate the agreement.” ABC § 55-c(5)(d)(v)-(vi). In addition, under Section 55-c(6):

If a brewer fails to comply with the provisions of this section, a beer wholesaler may maintain a civil action in a court of competent jurisdiction within this state for damages sustained in accordance with the laws of this state which shall govern all disputes arising under an agreement or by reason of its making and performance.

Id. § 55-c(6). While “the brewer has the burden of proving that its action was based upon good cause” in [*9]  legal actions challenging termination, “the wholesaler retains the burden of proof in all other respects.” S. End Distrib. Corp., 685 N.Y.S.2d at 596.

[T]he MBPA prohibits a brewer from terminating any “contract, agreement or relationship with a wholesaler” unless the brewer establishes that it has “good cause” and acted in “good faith,” which is implicit in New Jersey contract law. See id. § 33:1-93.15(c)(1), (c)(11). A party has “good cause” to act when the other fails “to substantially comply with reasonable terms contained in [the] contract or agreement . . . .” Id. § 33:1-93.14. For “successor brewers,” or “any person, not under common control with the predecessor brewer, who by any means . . . acquires the business or malt alcoholic beverage brands of another brewer, or otherwise succeeds to a brewer’s interest with respect to any malt alcoholic beverage brands,” the MBPA also provides:

It shall not be a violation of this act for a successor brewer to . . . terminate, in whole or in part, . . . the contract, agreement, or relationship with a wholesaler of [*10]  the brewer it succeeded, for the purpose of transferring the distribution rights in the wholesaler’s territory for the malt alcoholic beverage brands to which the successor brewer succeeded . . . provided that the successor brewer or the second wholesaler . . . first pays to the first wholesaler the fair market value of the first wholesaler’s business with respect to the terminated brand . . . .

Id. §§ 33:1-93.14, -93.15(d)(1). The MBPA creates a cause of action for any wholesaler to bring suit against a brewer “for violation of [the MBPA], or against a successor brewer in connection with a termination pursuant to [§ 33:1-93.15(d)(1)] of this act[.]” Id. § 33:1-93.18(a).

Defendant argues Biotronik, A.G. v. Conor Medsystems Ireland, Ltd., 939 N.Y.S.2d 739, 2011 N.Y. Misc. LEXIS 5282, 2011 WL 5385980 (Table) (Sup. Ct. Oct. 19, 2011), stands for the proposition that “[t]he ‘temporary withdrawal’ of a product subject to an exclusive [*13]  distributorship agreement constitutes a breach of contract.” (Def.’s Mem. at 7.) Not so. First, as Plaintiff argues, Biotronik “concerns issues of contractual interpretation when a product was permanently . . . withdrawn from the market . . ..” (Pl.’s Opp’n Def.’s Mot. Dismiss (“Pl.’s Opp’n”) at 7, ECF No. 15-7).4 Here, Plaintiff alleges only an alleged “temporary” withdrawal of the product from the distributor’s territory in 2005. Moreover, in this case, Plaintiff has not alleged a contractual breach; instead, Plaintiff alleges a statutory violation. (Compl. ¶¶ 18, 54-55, 60-61.) Second, even assuming Biotronik was factually analogous, it would not change the Court’s conclusion. That is, the Biotronik court did not reach the conclusion Defendant suggests. Rather, the court determined that “[t]he disputed issues of fact presented on this application forecloses [it] from ruling, as a matter of law, that [the defendant] did not breach the [d]istribution [a]greement when it withdrew [the product] from the market . . . .” Biotronik, 939 N.Y.S.2d 739, 2011 N.Y. Misc. LEXIS 5282, *6, 2011 WL 5385980 (Table), at *22.

Further, to the extent Defendant directs the Court to documentary evidence, including email communications between Plaintiff and KP that purportedly establishes that KP repudiated [*14]  the 2000 Agreement, such evidence cannot properly be considered at this stage as it is not incorporated into the complaint by reference, nor judicially noticeable. See Hu v. City of New York, 927 F.3d 81, 88 (2d Cir. 2019) (“In deciding a Rule 12(b)(6) motion, the court may consider only the facts alleged in the pleadings, documents attached … or incorporated by reference in the pleadings, and matters of which judicial notice may be taken.” (internal quotation marks and alteration omitted)).

New York’s ABC, section 55-c(2)(b), defines “brewer” as “any person or entity engaged primarily in business as a brewer, manufacturer of alcoholic beverages, importer, marketer, broker or agent of any of the foregoing who sells or offers to sell beer to a beer wholesaler in this state or any successor to a brewer.” ABC § 55-c(2)(b) (emphasis added).5 New Jersey’s MBPA has a similar provision, indicating “[e]very brewer shall contract and agree in writing with a wholesaler for all supply, distribution and sale of the products of the brewer in this State, and each contract shall provide and specify the rights and duties of the brewer and the wholesaler [*17]  with regard to such supply, distribution and sale.” N.J. Stat. Ann. § 33:1-93.15 (emphasis added). Based on the language of these statutes, Defendant argues Plaintiff must, and has failed to, plead a sale or offer to sell within New York or New Jersey. (Def.’s Mem. at 10-11.) In response, Plaintiff argues the “in this state” language should only be read as modifying the words “wholesaler” not “sells or offers to sell.” (Pl.’s Opp’n at 15.) Or, in other words, only the wholesaler needs to be within New York or New Jersey. (Id.)

Ultimately, the crux of the Court’s analysis on this issue turns on the interpretation of the language “in this state” under both statutes. And here, both parties’ analysis heavily references S.K.I. Beer Corp. v. Baltika Brewery, a district court opinion within the Eastern District of New York that considered this language within the New York statute as a matter of first impression. 443 F. Supp. 2d 313 (E.D.N.Y. 2006), aff’d, 612 F.3d 705 (2d Cir. 2010). In effect, Defendant urges the Court to adopt the reasoning of the S.K.I. Beer Corp. court’s analysis, while Plaintiff urges the Court to deviate from it. Ultimately, the Court finds the analysis in S.K.I. Beer Corp. persuasive and instructive here.

In S.K.I Beer Corp., the court considered [*18]  a dispute between Baltika Brewery and S.K.I. Beer Corporation, which turned, in part, on the “scope and meaning” of the “in this state” language of New York’s ABC, particularly whether the language modified “wholesaler” or “sells or offers to sell.” Id. at 318-23. There, the court first acknowledged that both interpretations were reasonable. The court noted “[o]ne might reasonably read the phrase ‘in this state’ as qualifying ‘wholesaler’—and not the type of transaction,” which would comport with the rule of the last antecedent, “an interpretive canon which confines the effect of qualifying words and phrases to the word or phrase immediately preceding the qualifier.” Id. at 318. However, the court also noted “[the contrary] interpretation is also reasonable, because one could, despite the rule of the last antecedent, read the phrase ‘in this state’ to refer back to the verbal phrase ‘sells or offers to sell beer,'” given “the phrasing here simply follows the order of object, indirect object, and place standard to English[.]” Id. at 319. Nonetheless, the court recognized statutory construction is a “holistic endeavor,” and conducted a fulsome analysis of the statutory language as a whole, the implications of each interpretation, [*19]  and the legislative history of the statute. Id. at 319-21. Based on this analysis, the court determined “it is clear that the phrase ‘in this state’ refers to the entire phrase preceding it[,]” or in other words, “the New York legislature intended to limit the Statute to sales and deliveries in New York.” Id. at 320.

Given the S.K.I. Beer Corp. court’s persuasive and thorough analysis, this Court need not reproduce the same here. That said, the Court notes it finds particularly persuasive the S.K.I. Beer Corp. court’s concern that Plaintiff’s interpretation raises constitutional concerns, namely, the dormant Commerce Clause. Id. (“Plaintiff’s reading would impose New York’s statutory regime for brewer-wholesaler relations on agreements consummated and completed on the other side of the globe simply because the wholesaler was licensed under New York law.”). In effect, accepting Plaintiff’s argument would mean that any transaction in the world with a licensed New York wholesaler is covered by the New York beer distribution statute. The constitutional concerns apply equally to the New Jersey distributor statute. Against this backdrop, the Court agrees Plaintiff here must plead that Defendant made a sale or offer to sell Zubr [*20]  in New York or New Jersey, which Plaintiff has not done.

New Jersey’s MBPA was enacted on March 1, 2006. N.J. Stat. Ann. § 33:1-93.15 Notably, and as Defendant argues, the statute explicitly provides “[t]his act shall apply to all contracts, agreements and relationships among any brewers and wholesalers, including contracts, agreements or relationships entered into, renewed, extended or modified after the effective date of this act.” Id. That said, the MBPA also provides that “[c]ontracts, agreements and relationships existing prior to the effective [*15]  date of this act that are continuing in nature, have an indefinite term or have no specific duration shall be deemed . . . to have been renewed 60 days after the effective date of this act.” Id. (emphasis added).

Defendant is correct that the enactment of the MBPA postdates the 2000 Agreement and any alleged purchase of beer by Plaintiff to distribute in New Jersey. (Def.’s Mem. at 8-9.) That said, Defendant’s argument ignores the explicit statutory language that enables retroactive application for contracts, agreements, and relationships, that existed prior to the effective date of the act, but that are continuing in nature. N.J. STAT. ANN. § 33.1-93.15. On the one hand, Plaintiff argues that the complaint alleges that on April 24, 2003, Dojildy (which had been purchased by KP), issued the 2003 Appointment Letter with no specific durational term. (Pl.’s Opp’n. at 9.) Defendant, on the other hand, argues that the 2003 Appointment Letter merely “acknowledges [Plaintiff] as KP’s brand agent” and “is not a distribution agreement” extending the exclusive distribution rights granted under the 2000 Agreement. (Def.’s Reply at 4.) Despite Defendant’s implication, the Court need not decide the full scope of the 2003 [*16]  Appointment Letter. The Court is satisfied that, at the very least, the 2003 Appointment Letter is sufficient to establish a relationship that is continuing in nature. Accordingly, the MBPA applies and Defendant’s motion to dismiss on this ground fails.