Maryland high court rules against Pabst and limits “successor brewer” under beer franchise law to different or new licensees finding it does not include change of control through new parent companies
The Court of Appeals of Maryland has affirmed a lower appellate court’s reversal of a win that Pabst had against a Maryland beer wholesaler under Maryland’s beer franchise law, the Maryland Beer Franchise Fair Dealing Act. The case is Pabst Brewing Co. v. Frederick P. Winner, Ltd. (link to opinion).
We reported on the lower court case back in May of last year. At that time the Appellate Court was faced with ruling on an appeal brought by a beer distributor, Frederick P. Winner, Ltd., that had lost a district court case to Pabst following Pabst’s termination of Winner’s franchise after Pabst had undergone a change in ownership at the grandparent corporate level (you can read the full details in the link above to our prior post).
The Maryland beer franchise act allows a successor brewer to terminate and pay fair market value. The Act defines Successor Beer Manufacturer as:
A “‘[s]uccessor beer manufacturer’ includes a person or license holder who replaces a beer manufacturer with the right to sell, distribute, or import a brand of beer.” Id. § 5-201(a)(5).cement before providing “notice of termination to the beer wholesaler to be replaced.” AB § 5-201(d)(1).
Pabst had gone through corporate sale and restructuring and while it hadn’t changed the entity that held its Maryland license it did change an upstream entity that owned the companies that owned the license.
As seen above in the Successor Beer Manufacturer definition, Maryland’s law about beer franchise termination and its definition of a successor manufacturer do not include the “change in control” or “change of ownership or shareholders” definitions like some other states do. While the district court had agreed with Pabst that a successor beer manufacturer includes a change of control of the upstream entities that own the beer manufacturer, the appellate court and now Maryland’s Court of Appeals disagreed and have reversed and found that the successor beer manufacturer definition of Maryland’s beer franchise law does not allow a change in control through new shareholders or upstream entities to satisfy the “successor” definition that would allow termination of a franchise granted to successor beer manufacturers under Maryland’s Beer Franchise Fair Dealing Act.
Maryland’s Court of Appeals considered the same arguments that were raised in the appellate court. Coming out on the side of the wholesaler, the opinion is an excellent analysis of the statute addressing three main points regarding interpretation. The first part of the opinion analyzes the definitions and the actual language of the statute, the second part of the opinion analyzes the legislative history of the statute, and the third part of the opinion analyzes some policy considerations raised by Pabst.
In the first part of the analysis the COA looked to the statutory definitions and to dictionary definitions to come to an understanding that:
[T]he plain language [of Maryland’s beer franchise law] requires a successor beer manufacturer to replace the previous beer manufacturer as the holder of a license or permit that allows a beer manufacturer legally to sell, distribute, or import a beer brand in Maryland.
In discussing the legislative history the Maryland Court of Appeals noted that the enactment and then subsequent Amendments of the Maryland Beer Franchise Fair Dealing Act never considered upstream parents or shareholder changes in defining successor beer manufacturers:
The answer, in our view, is that if the General Assembly had intended the [subsequent manufacturer law] to apply in that context, it would not have referred to “a person or license holder who replaces” an existing beer manufacturer; to the agreement between the “previous beer manufacturer” and the existing distributor; or to the “date of change of beer manufacturers.” And, as discussed in the next section, there are good reasons for the General Assembly to have distinguished between the replacement and non-replacement of the license/permit holder for purposes of triggering application of the [subsequent manufacturer law].
In analyzing the policy considerations the Maryland Court of Appeals noted that they were choosing form over substance in finding that the licensee needed to be replaced and that a change of control, while keeping a licensee in place, would not amount to a successor beer manufacturer under the statute. They addressed the argument that applying a holding regarding form over substance might allow a corporate owner to take advantage of this interpretation and through gamesmanship simply change the licensee by assigning rights to a new licensee while maintaining control. While they did briefly address the issue they also noted in a footnote that it was not before them:
Pabst makes a fair point about the potential for gamesmanship. However, we note that, under AB § 2-106, “[t]he Comptroller may restrict, suspend, or revoke a permit,” including a non-resident dealer’s permit such as the one that Pabst holds. If the corporate parent of a beer manufacturer obtains, or causes a subsidiary to obtain, a permit to further a scheme to trigger application of the SML without any bona fide change of control with respect to a beer brand, the affected distributor presumably will alert the appropriate State officials and urge revocation of the permit. This prospect may well deter an effort to obtain successor beer manufacturer status through a non-arm’s length transaction. If the General Assembly believes that the [successor manufacturer law] should be amended to require (or to clarify that the SML already requires) that the replacement of a beer manufacturer be the result of a bona fide change of control with respect to the beer brand, the General Assembly of course may do so.15
15 We need not decide whether the SML, as currently drafted, contains such a requirement. We also have no occasion in this case to consider whether there is any limitation on the amount of time a successor beer manufacturer may wait post-replacement before providing “notice of termination to the beer wholesaler to be replaced.” AB § 5-201(d)(1).
Since change in control is not a portion of the statute, it’s hard to understand how their justification regarding the state authority involving itself to consider a change in control could apply in such a situation, but that is an argument left for another day and another Brewer in attempting to gain the right to terminate a wholesaler arrangement in Maryland.
Beer wholesalers in Maryland should be aware that a brand changing licensees could potentially terminate the relationship and should be prepared for that by assessing the value of the brand or looking for assurances that no such change will occur. Brewers considering corporate restructuring or sales that intend to take advantage of state laws allowing successor owners to terminate existing beer distribution agreements should consider whether a new entity and new license will be needed in Maryland to effectuate distribution goals.