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
Brewers, distillers and vintners should pay attention to a recent ruling about an imported beer brand’s dispute with a distributor that it hadn’t shipped beer to in 18 years as it contains some important lessons for distribution agreement termination in franchise states.
The facts of Amtec Int’l of N.Y. Corp. v. Polish Folklore Imp. Co. (link to opinion) involve an importer of Polish beer – ZUBR – and its successor as well as a malt beverage wholesaler operating in New York and New Jersey.
In 1998 the beer distributor entered into an “import and wholesale agreement” (you can find the documents, the motions to dismiss and memoranda here) with Browar Dojlidy appointing the wholesaler as the sole importer of the Zubr brand in New York, Connecticut, New Jersey, Illinois, and Pennsylvania. Dojidly also issued an appointment letter designating the beer wholesaler as its brand agent for Zubr in New York, New Jersey, Connecticut, Illinois, Michigan, Wisconsin, Massachusetts, Maryland, Delaware, and Pennsylvania. The parties entered into a new beer distribution agreement in 2000 stating that the laws of Poland governed the beer distribution agreement and stated that the agreement would remain effective until the end of 2002 – “with the possibility of extension” subject to either party’s ability to terminate on 3 months’ notice.
Kompania Piwoarska purchased the Dojlidy brewery and obtained the rights to manufacture Zubr. Dojlidy issued a new appointment letter in 2003. The beer wholesaler ordered beer through September 2003 for distribution in NY, NJ and CT. In 2004, it sold $165,000 of Zubr in NY and $187,000 in NJ. THe complaint alleges the brewery “temporarily withdrew” from the market in 2005. According to the motions and the complaint, in 2018, the defendant in this case, Polish Folklore Imp. Co., submitted an application for a certificate of label approval to import Zubr. Then:
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)
The beer wholesaler sued alleging breaches of the New York beer franchise laws (ABC Section 55-c – agreements between brewers and wholesalers) and the New Jersey Malt Beverage Practices Act (NJSA 33:1-93.15(c)(1)) – the distributor did not sue for breach of the beer distribution agreements, which were governed by Polish Law, but sued only for statutory violations.
The new importer moved to dismiss the case making several arguments and the court addressed each, first noting the relative present state of both NY and NJ’s beer franchise laws and the fact that each has a “good cause” requirement for termination:
New York’s Alcoholic Beverage Control Law
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.
New Jersey’s Malt Beverages Practices Act
[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).
Here’s how the court came out on the beer importer’s arguments:
1. An argument that did not convince the court that many brewers, distillers, winemakers and others faced with leaving a market should contemplate – that leaving the market terminated the agreement so the statute of limitations from that termination has run – basically, exiting from a territory without sending notice of termination at the time the brewery left the market didn’t automatically terminate the agreement:
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)).
First takeaway: Note that this is the motion to dismiss stage, so facts might still show otherwise. Many brewers and distributors often put a clause in their agreements that makes the brewer’s leaving a territory an act of termination of the agreement within that territory. Additionally, fact discovery might show that portions of the parties agreements superseded or altered the statutory text in such a way that contractual provisions control – a legal determination based on facts that are potentially in dispute would not get resolved at this stage. But the point for governing brewer and distributor interactions in the future is clear. First, if the parties can agree, then definitely make leaving a territory an event that creates a termination a part of the beer wholesaler agreement. Second, if the parties can not agree and a brewer is leaving a territory for a time to specifically ed a relationship with a beer distributor, the brewery is well served to send a notice of termination and not just believe that later this will get viewed as a termination and not a temporary halt to sales in the territory for the period of non-sales (even if that period is 13 years or more).
2. The argument that did convince the Court to dismiss the malt beverage distributor’s claims (granting them leave to replead if they could): The claim that the sales at issue for the imported beer did not take place in either New York or New Jersey so the distributor did not meet the applicable definitions of under the beer franchise statutes regarding whether the statutes control. Basically, the beer distributor failed to allege that any of the sales of the beer took place in the United States or that title transfer happened in NY or NJ.
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.
3. The Court rejected the notion that Polish law applies to the statutory counts given the parties’ selection of Polish law in their agreements:
As to the choice of law provision, the parties agreed in the 2000 Agreement that the contract shall be governed by the laws of Poland. (2000 Agreement, Art. 15 ¶ 5.). Plaintiff, however, does not bring a breach of contract claim here. The choice of law provision is thus inapplicable to the present dispute which does not involve any claim for breach of contract. See, e.g., Fin. One Pub. Co. v. Lehman Bros. Special Fin., 414 F.3d 325, 335 (2d Cir. 2005) (“Under New York law . . . tort claims are outside the scope of contractual choice-of-law provisions that specify what law governs construction of the terms of the contract . . . .”); Plymack v. Copley Pharm., Inc., No. 93 CIV. 2655, 1995 U.S. Dist. LEXIS 15104, 1995 WL 606272, at *5 (S.D.N.Y. Oct. 12, 1995) (“A contractual choice-of-law provision, however, does not bind the parties with respect to non-contractual causes of action.”).
4. The court found the New Jersey Beer Franchise Law applied given language in the law that incorporates it into continuing agreements:
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.
The other takeaway: The sales/transfer of title argument is interesting. New York stands apart from many states in that it does not force out of state sellers to obtain permits to sell to NY wholesalers. So it may be more plausible that sales to NY wholesalers (the entities purchasing and bringing the beer into New York) take place elsewhere. Oddly, many transactions in craft beer actually take place this way. Despite the forced licensure/permitting by states of brewers, many beer distribution agreements state that title transfers at the craft brewery’s dock (FOB) which is in one state and that and shipping costs are on the wholesaler in another state. So a beer wholesaler in Ohio is actually agreeing contractually to title transfer and shipping costs of a beer from Virginia such that a brewer is not actually shipping the beer into Ohio, despite the state’s (just using these two as examples here – this happens everywhere) mandate that the Virginia brewer hold a license to sell the beer into the state of Ohio to malt beverage wholesalers in that state. If the beer franchise language holds similar in those states (or given the Commerce Clause issues noted above, even if it doesn’t) and the parties agree that the wholesaler took title in Virginia and shipped the beer into Ohio – shouldn’t breweries across the country be attempting to make similar arguments in briefs over non-resident or out-of-state brewery disputes?
Author’s note: the beer distributor has filed an amended complaint.