Beer Distribution Law - December 2013

by Lewitt Hackman
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TERMINATING AN OHIO DISTRIBUTOR-NOW WE KNOW FOR SURE

After InBev N.V./S.A.'s parent company acquired Anheuser-Busch Companies in July 2008, the U.S. Justice Department filed an antitrust lawsuit against InBev. As a result of that lawsuit, InBev was required to sell its Labatt brands, and KPS Capital Partners, L.P. acquired Labatt USA Operating Company L.L.C. in March 2009. Before the Labatt acquisition, Esber Beverage Company distributed Labatt brands exclusively in a territory in Ohio pursuant to a written franchise agreement with Labatt. In May 2009, Labatt notified Esber of its intent, as a successor brewer, to terminate the franchise agreement and compensate Esber for the loss of the Labatt brands as a result of the merger. Esber sued Labatt for wrongful termination and requested that the trial court issue an injunction preventing termination.

 

Under the Ohio Alcoholic Beverage Franchise Act, brewers must enter into written distribution agreements (aka "franchise agreements") with their distributors. If they do not, however, a franchise relationship will be deemed to exist by law after the distributor distributes the brewer's brands for at least 90 days. Brewers may not terminate a franchise relationship without good cause. However, when a successor brewer acquires all or substantially all of the stock or assets of the original brewer, the successor brewer may terminate the distributor's right to distribute a brand without cause as long as it repurchases any inventory on-hand, provides the distributor notice of the termination within 90 days of the merger and compensates the distributor for its loss of the brand.

 

In this case, the trial court agreed with Esber and held that Labatt was not entitled to terminate the franchise without cause under the successor brewer provision because, it opined, the successor brewer provision only applied when no written franchise agreement existed between the former brewer and the distributor. The appeals court reversed, however, finding that the statute does not differentiate between franchises based on written franchise agreements and those that arise by law. The Ohio Supreme Court, in an opinion apparently aimed at clarifying Ohio law, agreed with the appeals court and held that the language of the statute was clear and unambiguous on its face and that since Labatt qualified as a successor brewer and satisfied the notice requirements, it was entitled to terminate the franchise with Esber without cause, if it compensated Esber in compliance with the statute. To read the entire case, click here.  

 

WEST VIRGINIA COURT SAYS PAY FOR THE BEER OR GET OUT

 

The West Virginia Supreme Court of Appeals' decision in North Central Distributors, Inc., v. Moats serves as a reminder that in most states, a distributor's failure to timely pay a brewer's invoices will be just cause for the brewer to terminate the distributor's right to distribute the brewer's brands.

 

In April 2002, North Central Distributors, Inc. (NCDI) entered a distribution agreement with Labatt USA Operating Co., LLC (Labatt) that gave NCDI the exclusive right to distribute Labatt's brands in certain counties in West Virginia. Between August 2010 and January 2011, Labatt delivered beer to NCDI, provided NCDI with online invoices and attempted to draw payment of its invoices via electronic transfers from NCDI's bank account after each delivery, but each draw failed because of insufficient funds. Labatt sent "breach of distribution agreement" letters to NCDI on February 21, 2011 and March 4, 2011 demanding payment by March 18, 2011. When NCDI failed to pay, Labatt notified NCDI and the West Virginia Commissioner of Alcoholic Beverage Control of its intent to terminate the distribution agreement in 90 days. NCDI protested the termination and then paid the outstanding invoices on August 2, 2011.

 

West Virginia's Intoxicating Beer Act forbids either party to a beer distribution agreement from terminating the agreement "without due regard for the equities of [the terminated party] and without just cause." After a hearing, the Commissioner concluded that the distributor's failure to timely pay the invoices was a material breach of the distribution agreement and that the brewer had properly terminated the Franchise Agreement. NCDI appealed the Commission's decision, first to the Circuit Court, which affirmed the Commissioner's order, and then to the Court of Appeals, and argued that Labatt's termination of the Franchise Agreement was without due regard for the equities of NCDI and without just cause. The Court of Appeals disagreed and ruled that NCDI failed to act reasonably or justifiably by failing, for six months, to pay for the product it had received, that Labatt had just cause to terminate the Franchise Agreement, and that Labatt's termination notice complied with the West Virginia statute by identifying NCDI's breaching conduct, citing the contractual remedy, and providing NCDI with an opportunity to cure. To read the full case, click here. 

 

BEER IN THE NEWS:

Large Southern California Distributor Acquired By Reyes

 

Consolidation continues in the beer distribution business. The number of distributors in the US has dropped by about 1200 since 1980 to around 3200, although the number of breweries operating in the US has increased about 48 times over during the same period. Reyes Beverage Group, a subsidiary of Reyes Holdings LLC, the industries' largest player and the second largest distributor in California, recently announced that it has purchased Allied Beverages, Inc. of Sylmar, CA. Reyes ships over 100 million cases a year and Allied ships close to 12 million.

 

Beer Advent Calendar

 

The holiday season can be stressful, so to make the holidays a bit more festive, consider making a Beer Advent Calendar. This website www.instructables.com/id/beer-advent-calendar will show you how.

 

Is your dog drinking responsibly?

 

If not, Bowser Beer will make the perfect stocking stuffer for your pooch. Consider picking up a six pack from www.bowserbeer.com.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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