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Understanding the Three-Tier System: Its Impacts on U.S. Craft Beer and You

Understanding the U.S. market for alcohol beverages, including beer, requires an understanding of the three-tier system. Whether viewed with deep reverence or great scorn, it is a system of distribution that delivers the vast majority of beer to the mouths of thirsty American drinkers. Let’s take a few moments to understand that system a little better.

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Hard Cider for Brewers

Hard cider has shown phenomenal growth in the past several years.  With rising consumer demand, more and more craft brewers are entering this rapidly expanding market. Although hard cider is typically distributed and mar­keted like a beer product, the federal gov­ernment and most states actually tax and regulate cider as a type of wine.  Brewers contemplating the production of cider ac­cordingly must carefully consider the legal issues surrounding cider production and distribution that distinguish cider from beer.  This article outlines some of the most important (though certainly not all) of these issues.

This article was originally published in the May/June 2014 issue of The New Brewer.

Distilling 101 for Brewers

The craft distilling movement is growing rapidly. Indeed, the tor­rid pace of new distillery openings and the boundless enthusiasm of new entrants seem strangely reminiscent of craft brewing (then “microbrewing”) in the late 1980s and early 1990s.  Craft dis­tillers even have a simmering product in­tegrity issue (the use of purchased neutral spirits) that splits the new industry like contract brewing divided craft brewers 20 years ago.  There are, no doubt, signifi­cant differences, but craft distilling today seems poised for a period of growth like the one craft brewers have been (mostly) enjoying for the past 25 years.  Not surprisingly, then, a growing num­ber of craft brewers have followed the path of Anchor Brewing (or should I say Anchor Distilling) and expanded their offerings to include distilled spirits.  But as brewers quickly discover, there are numerous legal, regulatory, and tax differences between these related, but distinct, businesses.  While a full exploration of those differences could fill a rather thick book, this article briefly highlights the most important.

This article was originally published in the March/April 2014 issue of The New Brewer.

Franchise Law for the Craft Distiller

Mastering distribution is as important to a successful distiller as mastering distilling, packaging or advertising.  In a heavily-regulated industry, this requires knowledge of the applicable laws and regulations.

This article, originally published in the Winter 2013 issue of Artisan Spirit, explores, albeit at a very general level, how to manage one important category of those laws; so-called “franchise” laws.

Five Common Franchise Law Myths

Most people working for a U.S. packaging brewery are aware of so-called beer “franchise” laws.  Such legislation—enacted in some form in most U.S. states—limits or restricts the abil­ity of a brewer to change distributors.  The author leaves for another article any discussion of the fairness and logic of such enactments.  For now, this article explores some impor­tant basics about these laws and how they impact the brewer-distributor relationship.

This article was originally published in the November/December 2013 issue of The New Brewer.

Supreme Court of Ohio Clarifies Beer and Wine Franchise Law

Last month the Supreme Court of Ohio helped clarify an oft-litigated feature of the state’s beer and wine “franchise” law.  Like most such enactments, Ohio’s franchise law (the “Ohio Alcoholic Beverages Franchise Act”) generally requires a manufacturer or importer to show “cause” in order to terminate an Ohio distributor.  But a provision of the law permits the “successor manufacturer” of a brand to terminate Ohio distributors without cause within 90 days of acquiring that brand.  The successor must compensate the terminated distributor for the value of the distribution rights terminated.

The successor manufacturer provision, Ohio R.C. 1333.85(D), has been the subject of significant litigation in the past decade.  The recent opinion of Esber Beverage Company v. Labatt USA, Ohio S. Ct. No. 2012-0941 (Oct. 17, 2013), clarifies one important question surrounding the application of the law.

The Esber Beverage case arose after KPS Capital Partners acquired Labatt USA after U.S. antitrust authorities required the sale of U.S. Labatt rights following the purchase of Anheuser-Busch by InBev.  KPS/Labatt USA sought to terminate Esber Beverage under the authority of the successor manufacturer provision.  The Ohio trial court, however, held that the law’s successor manufacturer provision only applied if no written franchise agreement existed between the distributor and the former manufacturer.  Because KPS assumed the agreements Labatt USA had with Esber Beverage and other distributors, the trial court reasoned that the successor manufacturer provision did not permit termination.  An Ohio court of appeals reversed, and the Supreme Court of Ohio took the appeal.

Evaluating the question, the Ohio Supreme Court held that the successor manufacturer provision “is clear and unambiguous and permits successor manufacturers to assemble their own team of distributors so long as the successor manufacturers provide timely notice and compensate those distributors who are not being retained.”  Rejecting Esber’s argument that the successor provision should not apply where it held a contract with Labatt, the Supreme Court invoked the franchise law’s provision that prohibits parties from waiving any provision of the law.

While the Esber Beverage case does not resolve every question surrounding Ohio’s successor manufacturer provision, it does settle an important one.  Indeed, just one day before publication of the Ohio Supreme Court’s opinion, a U.S. District Court, applying Ohio law, enjoined a termination under the successor provision partially in reliance on the very contract argument rejected in Esber BeverageSee Tri Country Wholesale Distributors v. Labatt USA, S.D. Ohio No. 2:13-CV-317 at *35 (Oct. 16, 2013).




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