Focused On Franchise Law - June 2013

by Lewitt Hackman



Following his nomination by the Board of Governors of the Beverly Hills Bar Association, Barry became a member of the Association's Order of Distinguished Attorneys, the highest available level of the Association's membership, in June 2013.


On June 12, Barry was a co-presenter of a continuing legal education program, Franchise Law Update, for the Business Law Section of the San Fernando Valley Bar Association.





The Kurtz Law Group, A Professional Corporation, now advises brewers, importers and distributors on beer distribution law as part of its 30+ year focus on franchise law and provides these clients with experienced counsel on virtually every facet of the distribution process. The beer distribution industry is one of the most highly regulated industries in the United States and the differences among state statutes, regulations, licenses, taxes and control processes result in a legal minefield that can be difficult to navigate for brewers, distributors, retailers and the attorneys who advise them. From the creation of distribution agreements, to monitoring regulatory compliance, to providing ongoing business counseling, the Kurtz Law Group's clients benefit from the firm's extensive knowledge of franchise, distribution and transactional law and other franchise and distribution related matters.


Prior to the passage of the 18th Amendment in 1919, brewers and producers of other alcoholic beverages sold directly to retailers and often held ownership interests in taverns, known as "tied houses", which led to anti-competitive business practices and unscrupulous marketing tactics aimed at inducing excessive consumption. To combat that problem, the States ratified the 18th Amendment, ushering in the prohibition era and outlawing the manufacture, distribution and sale of all alcoholic beverages. The 21st Amendment repealed the 18th Amendment in 1933 and gave the states the primary authority to regulate the distribution of alcoholic beverages, including beer, within their borders. The three-tier system of beer production, distribution and sale was born establishing (1) suppliers (brewers and importers), (2) distributors and (3) retailers as the three tiers. State schemes regulating the three-tier system vary substantially; however, states generally fall into one of two categories: "license states" and "control states". License states are the most prevalent and regulate beer distribution by issuing different licenses to businesses in each tier. Control states obtain a direct interest in the revenues generated from distribution by taking an ownership stake as distributors or retailers of beer products. Control states typically exert greater control over the sale and promotion of beer products.




Large and powerful brewers dominate the beer distribution industry and most states aim to balance power in favor of distributors by requiring good faith dealings between brewers and distributors. The three-tier system works to prevent pre-prohibition style marketing tactics, generate revenues for the states, facilitate state and local control over alcoholic beverages and encourage temperance. Brewers produce the product and sell it to distributors who then sell the product to retailers (retail stores, taverns, etc.), who, in turn, sell the product to consumers. Distributors warehouse product to facilitate the efficient delivery to retailers, establish local markets for a brewer's brands, enforce product quality control standards, police retailers' sale of beer to the public, and provide the states with a platform for the taxation of beer products.

Considering the complexity and differences among the states' beer statutes, licensing schemes and implementation of the three-tier system, it is easy to see why the beer distribution industry is an intricate maze, fraught with peril for the unwary navigator, and why specialized legal advice is essential for those doing business within the three-tier system.



What potential liabilities may owners of a terminated entity franchisee face as a result of personally guaranteeing the entity franchisee's obligations in favor of the franchisor? As Violet Spear, the sole shareholder of Vianna, Inc., a terminated 7-Eleven franchisee in Evanston, Illinois, painfully learned, guarantors should expect to be liable for the franchisor's attorneys' fees and costs incurred to obtain performance under the franchise agreement and guarantee, which could be exorbitant.


In March 2008, 7-Eleven and Vianna signed a franchise agreement and Spear signed a Guarantee. In September 2010, 7-Eleven terminated the franchise agreement for cause and demanded possession of the store and its assets. Vianna failed to surrender possession of the store until the court issued an injunction and found Vianna and Spear in contempt for failing to immediately comply with the injunction. Although Spear expressly agreed under the Guarantee to pay Vianna's obligations, and 7-Eleven's reasonable attorney fees and any costs, she refused to pay 7-Eleven's attorneys' fees and costs when 7-Eleven tried to collect them from her under her Guarantee.


Spear filed a new action with the district court attempting to appeal the court's first decision and arguing the attorneys' fees and costs awarded to 7-Eleven should be waived or reduced "because it should not have taken much skilled lawyering to litigate against a pro se party (Spear)." Nevertheless, the court held that under Illinois law the Guarantee was enforceable and ordered Spear to pay $233,706 in attorney fees and costs to 7-Eleven. The court agreed with 7-Eleven that its attorneys' fees were "reasonable" and consistent with fees its attorneys charged other clients. In addition, the court noted that Spear's actions, including those related to her self-representation, delayed the proceedings and caused 7-Eleven to incur additional attorneys' fees. Click here to see the entire case.


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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