By: Louis J. Terminello, Esq. and Bradley Berkman, Esq
No party enters a contract with the expectation that its terms will be unfavorable to them. Having drafted innumerable agreements of all sorts, including beverage alcohol distribution agreements, we have learned that the underlying principle for successful contract negotiations and drafting is fairness. Put another way, the rights and duties of the contracting parties must be clear on the face of the agreement and the detriment or consequences to the non-performing party are clearly stated and actionable. Brewers and their distributors are no exception. Each has their own expectations and definitions of success.
Generally, for the brewer it’s to gain points of distribution at on and off premise venues with the goal of obtaining volume expectations. For the distributor it is to see the long terms benefits of their distribution efforts within its assigned territory. Distributors generally want a long-term relationship where they know their upfront efforts and costs will come back to them when any given brand attains a level of organic or self-sustained sales success. Brewers beware, however. Within the context of an ideal equitable agreement lies the malt-beverage franchise statute. These laws tend to favor the beer wholesaler and are superior in affect to any agreement executed between the parties. Many established brewers are aware of these statutes but many new brewers and brand owners are not. The purpose of this article is to introduce the new brewer and/or brand owner to franchise law basics and offer a few contract drafting suggestions that they can pass on to their contract lawyers that ultimately will create a brand success story that will benefit all parties to the agreement.
The Beer Franchise Law – the Basics
First, virtually every state has codified the concept of “franchise” into law. An informal and unscientific survey reveals that only three (3) states in the U.S. do not have beer franchise laws on their books. As a brewer, it’s best to assume, without research, that the new wholesaler you’re considering appointing has the benefit of the law and to negotiate any distribution agreement with that in mind. By now, you’re likely wondering what these laws are.
The National Beer Wholesalers Association (NBWA) rightfully states that that these laws are creatures of the 21st Amendment which grants the states the rights to regulate the distribution and sale of beverage alcohol within their borders. NBWA on its website states that these laws provide a number of positive regulatory contributions including providing consumers with beer choices by promoting the availability of diverse products, they allow brewers access to the marketplace while preserving the distributors’ independence and act as a public safeguard by requiring responsible sales through the three-tier system. These benefits indeed may be true.
But a closer look at the beer franchise laws also reveal that many statutory mandated provisions arguably benefit and favor the wholesaler operation and makes cancellation or termination of any brewer/distributor agreement an overwhelmingly difficult task for the brewer/brand owner. Broadly speaking, many beer franchise laws contain the following common elements:
• Franchise agreements can be made either orally or written.
• Franchise agreements appoint the distributor as the exclusive seller within an assigned territory and take effect at the time of first shipment by the brewer to distributor.
• A franchise agreement can only be terminated or cancelled on a showing of good cause and by the showing of a material breach by a party. Almost always, the brewer bears the burden of the showing of material breach by the distributor.
• Notice procedures and the timing of the same are explicitly stated in the statute(s) and must be complied with. Put another way, the brewer must notify the distributor that they are not performing according to the terms of the agreement.
• Opportunities to cure must be provided by brewer to distributors in accordance with the statutory timeframes.
• Buyout provisions and formulas to calculate brand buy-back are often included should the brewer desire to regain control over the brand.
The above provides the reader with a basic framework of a franchise law. Given that these authors concentrate their legal efforts in Florida, a closer look at the Florida franchise law follows and provides a good example of some of the language that a brewer will likely see in the laws of other states. Florida codifies its franchise law in Florida statute 563.022. That statute is entitled “Relations between beer distributors and manufacturers.” Florida Statute 563.022 is lengthy indeed with over twenty-one (21) parts. To address each part and its subparts exceed this publication’s length requirements for this article. As a caveat, though, to the brewer/brand owner reader, the statute is detailed, carefully drafted and will be relied upon by the courts of Florida in any breach of contract case likely brought by a distributor as Plaintiff and brewer as Defendant. A summary of the key points of the statute are offered below with an emphasis placed on unfair practices by the brewer/brand owner (supplier) and the grounds and procedures for terminating the distribution agreement.
Florida Statute 563.022
• “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, for a definite or indefinite period of time in which a manufacturer grants to a beer distributor the right to purchase, resell, and distribute any brand or brands offered by the manufacturer.
• Any person who enters into agreement with beer distributors in Florida is subject to this section.
• It shall be deemed a violation by supplier to:
o Coerce or compel distributor to accept product they have not voluntarily ordered.
o For supplier not to deliver reasonable quantities within a reasonable time after receiving a distributors order.
o Coerce or compel or attempt to coerce or compel, a beer distributor to enter into any agreement (written or oral) supplementary to a franchise agreement by the threat of cancelling the franchise agreement.
o To fix or maintain the price at which a distributor must resell the beer.
• DISTRIBUTOR’S RESIGNATION, CANCELLATION, TERMINATION, FAILURE TO RENEW, OR REFUSAL TO CONTINUE. Notwithstanding any agreement a manufacturer shall not cause a distributor to resign from an agreement, or cancel, terminate, fail to renew, or refuse to continue under an agreement unless the manufacturer has complied with all of the following:
o Has satisfied the applicable notice requirements.
o Has acted in good faith.
o Has good cause for the cancellation, termination, nonrenewal, discontinuance, or forced resignation. Good cause is defined as all the below occurring:
• There is a failure by the distributor to comply with a provision of the agreement which is both reasonable and of material significance to the business relationship between the distributor and the manufacturer.
• The manufacturer first acquired knowledge of the failure described in paragraph (a) not more than 18 months before the date notification was given.
• The distributor was given written notice by the manufacturer of failure to comply with the agreement.
• The distributor was afforded a reasonable opportunity to assert good faith efforts to comply with the agreement within the time limits provided for.
• The distributor has been afforded 30 days in which to submit a plan of corrective action to comply with the agreement and an additional 90 days to cure such noncompliance in accordance with the plan or to sell his or her distributorship consistent with the provisions of this section.
• BURDEN OF PROOF.—For each termination, cancellation, nonrenewal, or discontinuance, the manufacturer shall have the burden of showing that it has acted in good faith, that the notice requirements under this section have been complied with, and that there was good cause for the termination, cancellation, nonrenewal, or discontinuance.
• The manufacturer shall furnish written notice of the termination, cancellation, nonrenewal, or discontinuance of an agreement to the distributor not less than 90 days before the effective date of the termination, cancellation, nonrenewal, or discontinuance; in no event shall the contractual term of any such franchise or selling agreement expire without the written consent of the beer distributor involved prior to the expiration of at least 90 days following such written notice. The notice shall be by certified mail and shall contain all of the following:
o A statement of intention to terminate, cancel, not renew, or discontinue the agreement.
o A statement of the reason for the termination, cancellation, nonrenewal, or discontinuance.
o The date on which the termination, cancellation, nonrenewal, or discontinuance takes effect.
General Applicability, Takeaways and Contract Drafting Suggestions
Although the above is specific to Florida, hopefully it provides the reader with a bit more knowledge concerning these franchise statutes. Once again, many of the concepts codified in Florida law can also be found in similar laws of other states. An essential term in the Florida law that will likely be found in the franchise laws of other states is “Good Cause.” A showing of good cause must be made by the brewer to terminate or cancel a distribution agreement with a wholesaler. In Florida all the elements noted above (see the italicized language) must be present to show good cause. Another essential element which will guide the next part of our discussion is this:
“There is a failure by the distributor to comply with a provision of the agreement which is both reasonable and of material significance to the business relationship between the distributor and the manufacturer.”
For the brewer, brand owner or manufacturer, it is elemental that the agreement contains provisions which are both reasonable and of material significance, which if breached and all other requirements are adhered to, may provide them with legally defensible grounds for termination or cancellation of the agreement. Many times distributors try to avoid the inclusion of material terms for obvious reasons by handing over boilerplate agreements for consideration by the brewer. These boilerplate agreements may look reasonable on their face but almost always lack “teeth” and rely solely on the statutory language that overwhelmingly favors the distributor. But the smart brewer’s attorney will include reasonable material terms such as volume or points of distribution goals over a stated time period. Such material terms may be as simple as stating that the distributor must sell 100,000 cases for the first twelve months from the effective date of an agreement or establishing points of distribution by stating, as a rudimentary example, the distributor will achieve 75 placements (defining “placements” in a reasonable manner) in the first three months of the agreement and another 75 placements in the second three month period. As a contract drafting suggestion it is important to state that if the distributor fails to meet these goals these will be treated by the Parties as a material breach.
The above recommendations are provided as suggestions only and are not intended as legal advice. The point of this article is to arm the new brewer with useful information so they may level the playing field to a limited degree with their wholesaler partners at the start of the sales and distribution relationship. After all, the goal is to draft a fair agreement for all parties with the reasonable expectations of all are clearly stated. As a final caveat, beer wholesalers are powerful actors on the state stage. It is of paramount importance that the new brewer hire an experienced alcohol beverage attorney to assist in negotiations and contract drafting.