Sixth Circuit Tri County Decision Provides Much-Needed Clarity on “Successor” Provision in Ohio Franchise Law

By on July 12, 2016
Posted In Distribution

I attach a copy of the US Court of Appeals for the Sixth Circuit’s recent decision in Tri County Wholesale Distributors v. Labatt USA Operating Company, Nos. 15-3710/3769 (6th Cir., July 6, 2016). For students of the increasingly byzantine case law interpreting the Ohio franchise law’s “successor” provision, Ohio Rev. Code § 1333.85(D), the opinion provides some much-needed clarity on several points.

While the Tri County decision does not formally bind Ohio state courts on questions of Ohio law, it binds lower federal courts and provides strong persuasive authority to the state courts on the following points under the successor provision:

  1. A supplier-tier entity can qualify as a “successor” where the change-in-control occurred (as it frequently does in modern transactions) at the holding company level several corporate layers above the operating (brewing/winemaking) company. Distributors in Ohio have been arguing that the successor provision requires a new operating company that is, itself, a manufacturer, but the Sixth Circuit rejected this “hyperliteral” approach.
  2. The successor provision, by providing suppliers with a means to terminate without cause upon payment of fair market value compensation, does not constitute an unconstitutional governmental taking of property under the federal and Ohio constitutions. In rejecting the distributors’ contrary argument, the Sixth Circuit characterized Ohio’s beer and wine franchise statute as “an anticompetitive statute that deprives suppliers of their freedom to terminate contracts with distributors,” and the successor provision as “an exception to this anticompetitive scheme.”
  3. Distributors are not entitled to any additional award of damages for lost future income in addition to the fair market value paid to the distributors under the successor provision. The Sixth Circuit characterized this damages claim as “asking for a double recovery” because future profits are directly included in the calculation of fair market value.
  4. Distributors’ fair market value award should be reduced by the amount of profits they earned on selling the brand during the time spent litigating the successor status of the supplier. This final holding may substantially reduce the current incentive of distributors to challenge successor terminations under the Ohio statute, as the profit reaped from continued sales now will be deducted from the fair market value award distributors are due under the statute.

In short, the Sixth Circuit’s Tri County opinion represents a win for supplier-tier companies and clarifies a number of points of Ohio law that have been litigated extensively in the past several years.