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Contracts Corner: Distribution Agreements

Finding the right distributor is critical to the success of an alcohol brand—as is ensuring the agreement appointing that distributor provides ample protection for the supplier or brand owner. At a high level, suppliers should keep the following top of mind when entering into a distribution relationship or negotiating a distribution agreement:

(1) What territory do you wish the distributor to service? Consider the following: Does the distributor call on the accounts/channels that a supplier wishes to target with its brand? Does the distributor have the capability, sales force and reach to cover the entirety of the area assigned, whether it be a portion of a state, a region or the entire country? Where not mandated by franchise law, does assigning exclusive distribution territories make sense, or is dualing the brand a better option?

(2) Whether a state has franchise law applicable to the distribution of its product that will govern the relationship between supplier and wholesaler. With respect to the term and termination provisions of a contract, whether the state(s) where the distributor will handle products have franchise laws may heavily impact what within a distribution agreement is ultimately enforceable. This is particularly important in states that have alcohol franchise protections that make the termination of a wholesaler difficult. Distilled spirits and wine manufacturers should take advantage of the fact that far fewer states have franchise protections for the distribution of spirits than those that have franchise laws applicable to the distribution of malt beverages.

(3) What sales goals or distribution targets do you want the distributor to achieve? You can bake sales goals into a distribution agreement or agree to affix sales goals in annual planning or marketing meetings.

(4) What allocations will be made for marketing, if any? Contemplate the use of a marketing fund in a distribution agreement. These funds are often funded by both parties, with the use of the funds mutually determined by the parties during annual planning meetings. Note that a limited number of states prohibit these funds, or they require participation in them on the part of a wholesaler to be voluntary as opposed to compulsory.

(5) What factors will determine whether the distributor is adequately servicing a brand? Carefully spelling out what the obligations and expectations of a distributor are is critical to creating a successful distribution relationship. Include measurable and specific obligations, particularly in states where good cause must be established in order to terminate a relationship.

(6) What events trigger the termination of the distribution agreement or relationship? Consider both events that may trigger a for-cause termination and not-for-cause termination rights (typically after payment of a termination fee).

(7) How to address a change in control of the parties. Change in control terms in a contract should address a change in control within a wholesaler’s and a supplier’s business. Suppliers should advocate for approval rights and the right to request reasonable information about a new owner or another fundamental change of a wholesaler, even in franchise states. For changes [...]

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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.

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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.

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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.

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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.

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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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