Page 8 - Beverage Master February March 2020

Craft Beverage

and lighting conditions, exercising adequate quality tributors can be very severe in this section. In the
control measures to ensure product freshness, and beer industry, it is not uncommon to see values set
paying invoices within a specified time frame. It is at an entire year’s worth of profits times a multi-
also common to include termination rights if the plier that can range from 1.5 to many times higher.
distributor is declared bankrupt, enters a voluntary’ In practice, often a new distributor will buy out the
petition for bankruptcy, enters into a compromise distribution rights from the old distributor, but if
or agreement for the benefit of its creditors, or fails the supplier wants to return to self-distribution,
to maintain in good standing all Federal and State this buy-out provision may be cost prohibitive.
licenses and permits necessary for the proper con-
duct of its business. While the beer franchise laws in most states were
written at a time in which large beer manufactur-
In some cases, sale of the distributor or even a ers had significant market power over small dis-
change in the ownership structure may be justi- tributors, those roles have substantially reversed.
fication for termination. In February 2019, Bell’s Slowly, state laws are being revised to accommo-
Brewery of Kalamazoo, Michigan completely date this change. In Maryland, for example, the
pulled all of its distribution in the Commonwealth law changed on January 1, 2020 to eliminate the
of Virginia. The issue was that its distributor in “for cause” provision of termination for suppliers
Richmond was sold to a subsidiary of Reyes Beer who manufacture fewer than 20,000 barrels per
Division, the largest distributor of beer in the year and the termination notice was shortened
United States. Per its distribution agreement, the from 180 days to 45. However, the manufacturer
original distributor was to have provided Bell’s with still has to give the terminated distributor fair mar-
certain information about the sale to Reyes, but it ket value of the franchise.
failed to do so and Bell’s believed that because it
did not have the opportunity to properly vet the Territory
new distributor, termination of the franchise was
warranted. To this day the dispute has not been Depending on the size, experience, and reach of
resolved and Bell’s beer is not available in Virginia. the distributor, there may be an opportunity to cre-
atively carve out different territories. Territories are
most commonly limited to certain states. However,
a supplier may be able to limit a smaller distrib-
utor to certain counties or even specific types of
establishments (grocery stores, but not restaurants,
for example). One of the clearest breaches of the
distribution agreement, that may constitute good
cause for termination, is for a distributor to make
sales outside of its contracted territory.

Brands

Generally, when a distributor is hired to carry a
brewery’s brand, it has the right to all of the prod-
ucts in that brand. But exactly what constitutes a
In most states, a supplier must compensate the ‘brand” is unclear both in the statutory language
distributor for the lost business even if the supplier of most state franchise laws and in many distri-
is able to terminate for cause. Sometimes the law bution agreements. In Maryland’s beer franchise
simply says the supplier must pay the distributor law, for example, “brand” is not explicitly defined,
the “fair market value” of the distribution rights. but the law appears to favor the distributor in
There can be an expensive battle just to deter- terms of brand scope. Specifically, section 105 of
mine that compensation if fair market value is not Maryland ‘s Beer Franchise Fair Dealing Act prohib-
defined in the distribution agreement. Often the its a brewery from entering into a beer franchise
value is defined as a percentage of the prior year’s agreement with more than one distributor for “its
case volume multiplied by some dollar amount per brand or brands of beer” in a given territory. One
case. The “standard” contracts pushed by some dis- might argue that the language “or brands” means

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