Beer Distribution Law - January 2014

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PENNSYLVANIA COURT REFUSES TO REWRITE DISTRIBUTION AGREEMENT

 

A United States District Court in Pennsylvania, applying Pennsylvania law, recently rejected a distributor's argument that a brewer's refusal to permit the distributor to sell three of the brewer's new craft/specialty beers in the distributor's territory was a breach of the brewer's contractual duty of good faith and fair dealing.

 

MillerCoors LLC and Fuhrer entered into a Distributorship Agreement in January 1997 that granted Fuhrer the right to distribute certain MillerCoors brands listed in the Agreement. The Agreement permitted, but did not require, MillerCoors to allow Fuhrer to distribute new beer brands the brewer brought to Fuhrer's territory in the future. On at least one occasion after 1997, MillerCoors gave Fuhrer the rights to distribute new products, but MillersCoors refused to allow Fuhrer to distribute three new brands in 2012-2013. Fuhrer claimed MillerCoors' refusal was because he was also distributing beer for Anheuser-Busch in his territory, even though the Agreement permitted Fuhrer to do so without MillerCoors' consent.

 

Fuhrer alleged that MillerCoors told him he could sell its new beers if he created a sales unit dedicated solely to MillerCoors brands. Frustrated, Fuhrer filed a complaint against MillerCoors arguing, among other things, that MillerCoors' refusal amounted to a breach of the Agreement. In dismissing Fuhrer's complaint, the court acknowledged that the Agreement imposed a duty of good faith and fair dealing on MillerCoors in the "implementation, performance and enforcement" of the terms of the Agreement, but rejected Fuhrer's claim that MillerCoors' refusal to grant Fuhrer the right to distribute its new brands unless Fuhrer created a dedicated sales unit for MillerCoors' products was a breach of that duty. The court ruled that since MillerCoors was not obligated to grant Fuhrer the right to distribute its new beer brands, reading such an obligation into the Agreement would override the Agreement's express terms and convert a permissive contract provision into a mandatory obligation. To read the entire case, click here.

 

OKAY OKLAHOMA!!

 

Major brewers have not sold beer containing more than 3.2% alcohol by weight ("low-point beer") in Oklahoma since 1978. But, for the first time in more than 30 years, Anheuser-Busch (AB) has abruptly changed course and has started to sell beer containing 5% alcohol by weight ("strong beer") in Oklahoma. Why? Could Oklahoma be poised to change its beer distribution laws? A quick review of Oklahoma beer law may suggest an answer.

 

Oklahoma has some of the strictest alcohol laws in the country. The state's constitutional prohibition on the sale of alcohol was not repealed until 1959, 26 years after the 21st Amendment was ratified by the States, and Oklahoma bars were not permitted to sell liquor by the drink until 1985. Currently, gas stations, bars, convenience stores and grocery stores may only sell "low-point beer." Licensed liquor stores may sell unrefrigerated "strong beer," but may not sell "low-point beer."

 

Oklahoma's beer distribution laws are what set the state apart from the other 49 states. Most states require brewers to enter beer distribution agreements (aka franchise agreements) with beer distributors and to grant each distributor an exclusive distribution territory. This system allows states to closely monitor beer sales for tax and consumer protection purposes, protects the distributor and promotes temperance (by keeping prices higher). However, the Oklahoma Alcoholic Beverage Control Act (Act) requires an "open wholesale system." Brewers may not grant exclusive sales territories in Oklahoma, nor can they exercise much control over their products after they are sold to distributors (i.e. they cannot effectively enforce quality standards or sales standards to protect their brands). This "no-franchise ban" was not enforced until the Oklahoma Supreme Court handed down its decision in Adolph Coors Co. v. Oklahoma Alcoholic Beverage Control Bd. in 1978, when it upheld the law's requirement that brewers must sell to any distributor that wishes to sell its brands. 

 

In response, Coors, as well as the other major brewers, withdrew all of their strong beer brands from Oklahoma assuming there would be a public outcry and demand for a change in the law. Surprisingly, though, the citizens of Oklahoma and the state's lawmakers never caved, but neither did the big brewers, until now. According to local retailers, the only real change is that AB is now selling a few of its more potent potables in kegs, not in bottles or cans. Apparently AB hopes that by extending this olive branch, the state will rethink its position. But, it remains to be seen whether other brewers will follow AB's lead and whether AB's gesture will move Oklahomans to revise their Act to allow brewers to enter into franchise agreements with distributors of their choice so they can exercise the control they claim they need to protect their brands. Stay tuned.

 

ON THE LIGHTER SIDE: 2013'S 7 WEIRDEST BEER STORIES

 

Last month we posed the question "Is your dog drinking responsibly?" and suggested that if not, you might want to pick up some Bowser Beer for your best friend. This month we call your attention to Parade's article, "The 7 Weirdest Beer Stories of 2013," which we think is worth a read (we hope you will agree). The winners include a story about "Hello Kitty Beer," a Japanese brand "aimed at winning over Chinese women," another about a man who produces beer using yeast grown from hair from his own beard and yet another that espouses beer drinking to enhance one's responses to vaccines and to lesson one's susceptibility to the common cold. Enjoy the entire article by clicking here.

 

Topics:  Breach of Contract, Breach of Duty, Breweries, Covenant of Good Faith and Fair Dealing

Published In: Business Torts Updates, General Business Updates

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.

© Barry Kurtz, Lewitt Hackman | Attorney Advertising

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Barry Kurtz
Lewitt Hackman

Barry Kurtz is the Chair of our Franchise Practice Group, currently one of the largest franchise and... View Profile »


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