Court provides stark reminder to liquor and beer distributors about why FOB terms matter: the location of title transfer or sale can determine whether you have franchise protection thanks to the Dormant Commerce Clause.

In a recent opinion showing the 21st Amendment and state franchise laws must work within the confines of the Commerce Clause a New York federal court has granted a second motion to dismiss the complaint of a New York beer importer and wholesaler finding that because sale of the beer (transfer of title and payment) took place outside New York, the state franchise law did not apply and could not help the wholesaler keep the rights to distribute the beer when a new importer started importing and selling the beer to other wholesalers in the state.

We previously wrote about this case, Amtec International v. Polish Folklore Import Co. here. You can read the background and facts in that post.

At that time, the Court granted the defendant’s initial motion to dismiss for several reasons and noting the Court’s finding that a 13 year market withdrawal did not result in termination of the importation and distribution agreement between the wholesaler and the brewery without further actions signifying termination.

We also noted in that post that the Court, in granting the beer distributor/importer the right to re-plead, left open the issue as to whether the principals of the Dormant Commerce Clause prohibiting extra-territorial economic control precluded the application of New York’s beer franchise law allowing the distributor to keep control of the brand to the exclusion of the new wholesalers chosen by the new importer because “sales” (i.e., payment and title transfer) took place outside New York. 

Here is the Court’s reasoning from that initial decision:

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.

Re-plead they did and the new importer brought a second motion to dismiss. The issues examined in the Court’s order granting the motion to dismiss squarely address the Dormant Commerce Clause’s application and prohibition on applying the state beer franchise law where sales to the wholesaler (because it was also an importer) did not take place in the state but rather took place at the foreign brewery’s warehouse.

The controlling beer importation and distribution agreement in this case had provisions regarding transfer of title and shipping by referencing acceptance and INCOTERMS Ex-Works – EXW – the Brewer’s warehouse:

1. The delivery of the Products and acceptance thereof by the Distributor shall be at the Manufacturer’s warehouse located in Białystok, at ul. Dojlidy Fabryczne 28 , Poland.

2. The title to the Products along with all the related costs and risks shall pass onto the Distributor as at the moment of the Product’s acceptance by the Distributor confirmed in the relevant internal export invoice signed by the Distributor’s authorized representative (EXW – the Manufacturer’s warehouse located at ul. Dojlidy Fabryczne 28, Białystok).

Those of you in the U.S. using the Uniform Commercial Code’s terms would understand this as F.O.B. place of shipment:

§ 2-319. F.O.B. and F.A.S. Terms.

(1)Unless otherwise agreed the term F.O.B. (which means “free on board”) at a named place, even though used only in connection with the stated price, is a delivery term under which

(a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or

(b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503);

(c) when under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this Article on the form of bill of lading (Section 2-323).

The beer distribution contract also had provisions regarding payment:

1. The Distributor’s payment for Products requisitions in an order, constituting a pro-forma invoice, shall be effected by depositing 50% of the purchase price, by way of advance payment, to the Manufacturer’s bank account: *******. The remaining 50% of the purchase price shall be paid to the Brewery’s bank account within 35 (thirtyfive) days of the date of issue of the invoice.

The Court had originally held that the plaintiff needed to do more by way of pleading specifically, “the Court explained that a brewer falls outside of the reach of ABC [NY’s beer franchise statute] unless it ‘sells or offers to sell beer’ to a wholesaler in the state of New York. 

The beer wholesaler’s amended complaint raised new allegations that the new importer now sells beer to other beer distributors in New York, that the sales by the new importer in New York to others amounted to a de facto termination of the old beer distributor’s rights, and that the beer distribution agreement between the brewery and beer distributor appointed the beer wholesaler to sell the beer and granted the right to use the brewery trademarks in the territory and named the wholesaler as the sole supplier of the products in the territory to any new customers.

The Court found that these allegations did not address or solve the problem of the sales needing to occur in the territory:

In granting Defendant’s motion to dismiss the original complaint, the Court relied heavily on the reasoning set forth in S.K.I. Beer Corp. v. Baltika Brewery, 443 F. Supp. 2d 313 (E.D.N.Y. 2006), aff’d, 612 F.3d 705 (2d Cir. 2010). That case considered the very question at issue here: “whether any transaction anywhere in the world with a licensed New York wholesaler is covered by [ABC], or whether it pertains only to those transactions where the sale or the offer are made in New York.” Id. at 319. While the court in S.K.I. Beer Corp. acknowledged that the statute could reasonably be interpreted to mean the former, it ultimately held that the statute, when viewed holistically, “compels the conclusion that it regulates only those sales and deliveries which take place in the State of New York.” Id. at 318, 322. The court keenly noted that certain ambiguities were “clarified by the purpose of the statute, which provides for regulation of ‘the sale and delivery of beer by brewers’” as a matter of state policy. Id. at 319 (emphasis in original). And, more to the point, the court found that ABC is “instinct with the purpose of regulating the sale and delivery in [the state of New York] of alcoholic beverages.” Id. (citing ABC § 2).

Here, according to the 2000 Agreement, the “delivery of the Products and acceptance thereof by the Distributor [occurred] at the Manufacturer’s [] warehouse,” and payment for the products was “effected by depositing [the purchase price] . . . to the Manufacturer’s bank account,” both of which were situated in Poland. (See Ex. 2 at 2–3, Def.’s Mot.) In other words, the sale and delivery of the product at issue, Zubr, took place outside of New York and New Jersey.

In addition, and as the Court previously found, Plaintiff’s effort to prosecute Defendant for violations of ABC and MABPA runs afoul of the dormant Commerce Clause. See Amtec I, 2022 WL 992565, at *6. Here again, S.K.I. Beer Corp. proves instructive. As that court explained, “[t]he Commerce Clause . . . precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders whether or not the commerce has effects within the state.” S.K.I. Beer Corp., 443 Supp. 2d at 319–320 (quoting Healy v. Beer Inst., 491 U.S. 324, 336 (1989)). Therefore, for the same reason Plaintiff’s claim fails under a reading of the statute, it fails under the United States Constitution: The transaction for the sale of the product between Plaintiff and Defendant was wholly exterritorial to both New York and New Jersey. That, as Plaintiff argues, “the 2000 Agreement makes clear that the final destination of the Zubr Brand products was New York and New Jersey,” is of no consequence. (Pl.’s Opp’n at 9.) Put differently, the dormant Commerce Clause operates to preclude a state from regulating wholly extraterritorial commerce, even where the commerce may have effects within the state. Likewise, Plaintiff’s allegations that Defendant sold or offered to sell to other duly licensed distributors, “with such sales actually taking place in New York and New Jersey,” does not overcome the Commerce Clause’s prohibitions. (Am. Compl. ¶ 5.) Under Plaintiff’s current argument, a state would be permitted to regulate wholly extraterritorial commerce between a brewer and distributor so long as that brewer conducts any commerce within the state, however tangential. Such a finding cannot be read consistent with the Commerce Clause; rather it would do violence to it.

A strong ending.

For a beer wholesaler looking to protect the brands, a contractual provision changing where title transfers or clarifying sale location FOB destination, for instance. The issue left open for another day would have been if contractually the parties had terms applying a beer franchise law to their relationship which ultimately in this situation, given the Constitutional issues, may have resulted in argument over the specific contractual language (e.g., a term stating that a beer franchise law “applies” could be interpreted differently that a provisions stating that the parties “relationship will be governed by” the beer franchise law or the “transactions hereunder shall be governed by” the beer franchise law). Sometimes alcohol manufacturers press for contracts saying that “to the extent applicable” (or some version of this) the state alcohol franchise law will govern, which may lead a distributor to assume it does, but this case calls that into question and the phrasing leaves the argument open for contest in a legal dispute.

This case is a lesson to carefully consider contractual shipping and sale terms and to be more thoughtful in language regarding the application of particular franchise statutes.

You can find the Second Motion to Dismiss here.

You can read the Response in the beer distribution agreement dispute here.

Here is the beer importer’s Reply.

Ashley Brandt

Hi there! I’m happy you’re here. My name is Ashley Brandt and I’m an attorney in Chicago representing clients in the Food and Beverage, Advertising, Media, and Real Estate industries. A while back I kept getting calls and questions from industry professionals and attorneys looking for advice and information on a fun and unique area of law that I’m lucky enough to practice in. These calls represented a serious lack of, and need for, some answers, news, and information on the legal aspects of marketing and media. I've got this deep seeded belief that information should be readily available and that the greatest benefit from the information age is open access to knowledge... so ... this blog seemed like the best way to accomplish that. I enjoy being an attorney and it’s given me some amazing opportunities, wonderful experiences, and an appreciation and love for this work. I live in Chicago and work at an exceptional law firm, Goldstein & McClintock, with some truly brilliant people. Feel free to contact me at any time with any issues, comments, concerns… frankly, after reading this far, I hope you take the time to at least let me know what you think about the blog and how I can make it a better resource.

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