Focused on Franchise Law - August 2013

by Lewitt Hackman
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FRANCHISOR 101: CALIFORNIA REQUIREMENTS ON NEGOTIATED TERMS MAY CHANGE

The California Franchise Investment Law and the California Code of Regulations currently require franchisors registered in California to disclose to their prospective California franchisees all terms different from those contained in their franchise disclosure documents (FDD) that have been negotiated in franchise agreements with other California franchisees during the previous 12 months. Both franchisors and franchisees have complained that this requirement discourages, rather than promotes, the negotiation of franchise agreement terms by franchisors offering franchises for sale in California.

 

Relief from this requirement may be forthcoming. The California Department of Corporations (DOC) has responded favorably, by letter, to a proposal by the Franchise Law Committee of the Business Law Section of the State Bar of California (FLC) that would allow franchisors to negotiate changes to the terms in franchise agreements without disclosure of the negotiated terms in their FDDs. Under the FLC's proposal, Franchisors would instead add standard language to their FDD stating that 1) California law does not prohibit franchisor-franchisee negotiations, 2) the franchisor does or does not, as a general practice, negotiate franchise agreement terms with prospective franchisees and 3) general information about the negotiated franchise sale process will be available to the public on a DOC website.

 

Franchisors and franchisees alike are expected to welcome this change if and when it is adopted.

 

FRANCHISE 101: EXERCISE CAUTION WHEN MARKETING BEER OVER THE INTERNET AND DIRECT SHIPPING BEER TO CUSTOMERS

In advance of the upcoming launch of the Kurtz Beer Distribution Law website in early September, we thought we would touch on a topic that is relevant to brewers, beer distributors and beer drinkers alike: the sale of beer through the Internet!

 

Beer distribution relationships are highly regulated by all states, and many states have passed relationship laws to provide protections to beer distributors similar to the way that some states, such as California, have passed franchise relationship laws to extend protections to franchisees. (For brewers, think franchisors, for beer distributors, think franchisees). As part of these protections, all states require brewers to distribute beer through a state licensed beer distributor once the brewer produces a certain amount of beer each year. Finding a distributor willing to distribute can be difficult for small brewers. So, most states exempt craft brewers, aka micro breweries, from this requirement and allow them to self-distribute.

 

Craft brewers are looking to the Internet to market their products with hopes of direct shipping their beers to customers both inside and outside of their home state. At first blush, this alternate channel of distribution sounds promising. The problem is, that while 39 states and Washington D.C. allow producers to direct ship wine to customers in their states, only 9 states currently allow beer to be shipped into their states to anyone other than a licensed distributor. Many of the states that do allow this have burdensome restrictions. For example, Arizona requires all shipments to go through a licensed wholesaler or retailer. Hawaii requires customers to obtain a state issued permit in advance of delivery. On the other hand, Virginia allows licensed brewers or retailers to direct ship up to two cases of beer per month to a customer's home for personal consumption. To further complicate the process, it is illegal to ship alcoholic beverages through the US Postal Service (USPS).

 

To mix metaphors: the tide is turning and the winds of change are blowing. States are becoming more receptive to the idea of allowing the direct shipment of beer. Vermont just passed Senate Bill 61 in June 2013 allowing licensed brewers to directly ship up to 36 gallons of beer per year to Vermont residents, despite strong opposition and lobbying efforts from large brewers and beer distributors. Other states will likely follow suit. This month the US Postmaster General endorsed an idea being circulated in Congress to change the 1909 law banning the USPS from shipping alcohol. Doing so, he said, has the potential of providing $50 million in additional revenue annually for the ailing post office. All-in-all it is clear that Internet marketing and the direct shipment of beer hold promise for craft brewers looking for ways to distribute their brands until they become large enough to contract with beer distributors. But, until more states take action, craft brewers must proceed with caution. 

 

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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