Whether you’re an experienced brewer getting ready to enter a new state, a startup packaging brewery looking to serve your home market, or a brewpub expanding to provide products to local retailers, you need a viable distribution plan. In recent years, individual brewers have deepened their understanding of industry dynamics in the heavily regulated beer distribution system. While many are effectively advocating reforms to accommodate new brewery business models, change occurs slowly in the political process. Those in business today who want to remain in business tomorrow need to deal with the existing realities of the marketplace. The following is a primer of common questions and answers related to distribution.
On Wednesday, February 25, 2015, the U.S. Court of Appeals for the Third Circuit issued its opinion in Frank B. Fuhrer Wholesale Co. v. MillerCoors LLC, No. 14-1008 (3d Cir. 2015), finding in favor of MillerCoors LLC (MillerCoors) that the brewer did not violate its contract with Frank B. Fuhrer Wholesale Co. (Fuhrer) or Pennsylvania’s alcohol beverage laws in assigning the distribution rights for several new products to other distributors and attempting to condition the award of future products to Fuhrer on Fuhrer establishing a new entity devoted to MillerCoors products. The case stemmed from Fuhrer’s 1997 distribution agreement (the Agreement) with Coors Brewing Company (Coors). In 2008, Coors and Miller Brewing Company created MillerCoors, a joint venture, and Coors transferred the Agreement to MillerCoors.
The Agreement made Fuhrer MillerCoors’ exclusive distributor of certain specified MillerCoors products in an area of Pennsylvania. The Agreement gave MillerCoors the right, but not the obligation, to grant distribution rights to Fuhrer for additional MillerCoors products. The Agreement also gave Fuhrer the right to acquire distribution rights for other brewers’ brands without MillerCoors’ consent, which Fuhrer has exercised (e.g., in selling certain Anheuser-Busch products). The Agreement required both parties to exercise “good faith and fair dealing” in carrying out its terms.
MillerCoors introduced three new beers in 2012 and 2013 and awarded the distribution rights for the products to Fuhrer’s competitors. Fuhrer sued, alleging that MillerCoors: (1) failed to give Fuhrer the rights to the new products because Fuhrer also sold for Anheuser-Busch; and (2) told Fuhrer it would need to create a new entity dedicated to MillerCoors products in order to obtain future rights to new MillerCoors products. Fuhrer sought a declaratory judgment and asserted claims for breach of contract, violation of the Pennsylvania Liquor Code, unreasonable restraint of trade, and tortious interference. The district court granted MillerCoors’ motion to dismiss and denied Fuhrer’s motion for reconsideration.
On appeal, Fuhrer argued that it objected not to MillerCoors’ assignment of the distribution rights for the new products elsewhere. Instead Fuhrer argued that the process by which MillerCoors undertook this action violated the Agreement’s covenant of good faith and fair dealing. The Third Circuit agreed with the district court that under Pennsylvania law, “the duty of good faith cannot override express contractual terms and convert a permissive contract provision into a mandate.” MillerCoors, the court held, accordingly did not violate its duty of good faith by exercising its contractual right to choose different distributors for the new products.
The Third Circuit also found that because the Agreement placed no obligation on MillerCoors to assign Fuhrer distribution rights to new products, MillerCoors’ proposal to grant Fuhrer such rights in exchange for Fuhrer creating a new entity devoted to MillerCoors did not constitute bad faith performance, but was an “arm’s-length negotiating tactic, offering to barter contractual right for contractual right.” MillerCoors’ proposal did not interfere with Fuhrer’s rights under the Agreement, and accordingly did not constitute a breach of contract. The court also noted that there was [...]