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Articles & Newsletter

Yuengling and Boening Settle Case

Court Hands Down Favorable Distributor Ruling in NY Case

New Supplier Tricks: When are exclusive Territories not Exclusive?

Unintentional Liabilities Arbitration of Brewer & Wholesale Disputes

Clare Rose, NY A-B house, files suit against InBev and Manhattan Beer

Upcoming InBev Consolidations Led to Legal Fireworks in Metro NY

United States District Court For The Northern District of Illinois Eastern Division

Direct Shipping Part II: A Big Victory For Distributors In The Second Circuit

Overcoming Adverse Con Tractual Terms: Does Action Speak Louder Than Words?

Arbitration Of Brewer Wholesaler Disputes: The Good The Bad And The Ugly

Employee Discrimination Claims: A Handbbok For Creating A Safe Harbor For Employees

Miller’s Proposed Amendment: The Coor’s Conflict Is Only The Tip Of The Iceberg

Sub-Distributors Beware: You May Not Have The Statutory Protection You Think You Have

Direct Shipping Part III: The Supreme Court Strikes Down Bans On Direct Shipping And A Staunch Supporter Of The Twenty-First Amendment Retires

Bankrupt Brewers And Distributers Effect On Distributions

Modelo V. Gambrinus: Performance Does Not
Count

Barton Gets (Half Of) The East

Sub-Distribution Rights Revisited

Miller & Coors: Whose Consolidation Will It Be?

Miller & Coors II: To Sell Or Not To Sell (That Is The Question)

The Miller Coors Agreement: Who Will Be The Master Of Your Domain?

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“The Legal Buzz”

SUB-DISTRIBUTORS BEWARE: YOU MAY NOT HAVE THE STATUTORY PROTECTION YOU THINK YOU HAVE

In many areas of the country large distributors or distributors granted large territories will appoint sub-distributors to handle a portion of their exclusive territory. Indeed, the current trend of reducing the number of wholesalers covering a territory while creating more and more mega-wholesalers covering ever larger territories is bound to increase this practice. This article will focus on the statutory rights of sub-distributors. Before going further, let’s define what we mean by “sub-distributor”. We are referring to holders of wholesalers’ licenses, whose business is limited to selling at wholesale, but who, in addition to having agreements directly with brewers also have agreements with other wholesalers for sub-distribution. We are not referring to the so-called 4th tier of distribution common only to metro New York, the “Home D”, which is licensed to sell both at wholesale and retail.

Sub-Distributors Build Brands Too


Sub-distributors do the exact same job as the distributors that grant them such rights. Sub-distributors service retail accounts, generally contribute to marketing quotas, deliver beer, pick up empties and keep the market free of old beer. In every way that prime wholesalers build brand equity, sub-distributors do as well. The reason is simple, they run their sub-distribution business exactly the same as they do their prime distribution business; the only difference is the source of the product. Indeed, we guaranty that sub-distributors consider themselves equal to prime distributors in every aspect of their business, and therefore consider themselves entitled to the same statutory protections as prime distributors. The question is, however, do they enjoy such rights?

States Protect Their Beer Wholesalers

The twenty-first amendment of the Constitution grants to the states the right to regulate the distribution of alcoholic beverages within their borders. Utilizing the broad powers granted under the twenty-first amendment roughly 38 states have enacted legislation which is protective of beer wholesalers in various ways. While a stated goal of much legislation in this area is creating and maintaining strong and financially independent wholesalers, the legislation implicitly, and sometimes explicitly, recognizes the value that beer wholesalers add to the building of the equity of the brands of beer that they sell. The legislation also generally recognizes the historical imbalance of bargaining power between brewers and wholesalers and attempts to “level the playing field” between the two factions.

Thou Shalt Not Terminate Wholesalers Without Cause

Primary among the historical “wrongs” that this legislation attempts to “right” was the ability of a brewer to terminate a wholesaler without cause and without compensation. As a result, the primary goals of this protective legislation are to make it difficult for brewers to terminate wholesalers and to assure that wholesalers that are terminated other than for “bad behavior” are compensated for their brand-building efforts. Accordingly, those wholesalers which are fortunate enough to toil in a state that has enacted such legislation are assured of some modicum of protection, depending, of course on the particular state and the particular statute.

Do Sub-Distributors Have the Same Statutory Rights as Prime Distributors?


I n order to answer this question, let’s consider a fictitious example. “Mega Wholesaler” obtains the statewide rights to distribute “Import X” which at the time does not have significant distribution. Mega-Wholesaler decides that the state is simply too large for it to cover and decides to appoint a few wholesalers in the state as sub-distributors to cover the areas that it does not want to. These other wholesalers have other significant brands in their portfolio already but agree to enter into a sub-distribution agreement with Mega-Wholesaler for Import X. These sub-distribution agreements provide that the term is for one year, but automatically renew unless terminated upon 30 days notice by Mega-Wholesaler. The years go by and the sub-distributors dutifully fulfill their obligations helping to build the brand. Indeed, over time Import X becomes one of the largest selling imports in the country.

Everything is going great until the Import X brewery is sold to “Mega-Domestic Brewer”, and Mega-Domestic Brewer decides that it wants its existing distribution network to handle all distribution of Import X and it gives Mega-Wholesaler notice that it is terminating its distribution agreement. Mega-Wholesaler calls its attorney to determine what its rights are as far as Mega-Domestic Brewer’s termination notice. The attorney tells them that they are fortunate because their state beer franchise statute prohibits termination without good-cause. Being the shrewd businessman that he is, however, the President of Mega-Wholesaler believes that the market for Import X has peaked and decides that he will sell to Mega-Domestic Brewer if he can obtain a premium for the brand, using as leverage the fact that Mega-Domestic Brewer is unable to terminate Mega-Wholesalers agreement under the state statute.
Negotiations go back and forth for a while and ultimately a deal is struck between Mega-Wholesaler and Mega-Domestic Brewer for the sale of the distribution rights in the state. As a result, Mega-Wholesaler gives all of its sub-distributors the 30 days notice required under the sub-distribution agreements that it is terminating those agreements. Panicked, the sub-distributors decide to retain common counsel to review the situation and advise them of their rights.

What a Difference a State Makes

So, do the sub-distributors have any rights to assert against Mega-Wholesaler’s attempted termination? Perhaps not surprisingly, the answer in large part depends upon what state law and specifically what state beer franchise statute is applicable . To illustrate the point we will analyze the claim under the beer franchise statutes of Illinois and New York. The Illinois statute, commonly known as the Illinois Beer Industry Fair Dealing Act (“IBIFDA”) does provide a remedy to the terminated wholesalers (sub-distributors). On the other hand, the New York statute, Alcoholic Beverage Control Law § 55-c (“ABC § 55-c”) likely does not.

The difference between the statutes on this issue lies in the definition section of the statutes. The Illinois statute defines a “brewer” as including a manufacturer of beer and also a “master distributor” which is further defined as a wholesaler that in addition to selling to the retail trade, also sells to other wholesalers in the ordinary course of its business. Hence under IBIFDA, Mega-Wholesaler is not only a wholesaler, it is also a brewer. Accordingly, IBIFDA’s prohibition against termination of an agreement between a brewer and a wholesaler without good cause applies not only to Mega-Wholesaler’s agreement with Mega-Domestic Brewer; it also applies to Mega-Wholesaler’s agreements with sub-distributors. In other words, IBIFDA recognizes the dual roles played by Mega-Wholesaler. On the one hand it is a wholesaler buying product from and dealing with a brewer while on the other it is a supplier itself, selling product to other wholesalers.

The New York statutory scheme is different. In New York, the drafters of the statute took a different approach in defining the term “brewer”. Under ABC § 55-c, a brewer is essentially limited to a manufacturer, importer, marketer, broker or agent of any of the foregoing that sells beer to a wholesaler in the state. Conspicuously absent from the New York definition of “brewer” is the concept that a master wholesaler or a wholesaler that sells to other wholesalers is, in effect acting as a brewer, as is recognized in the Illinois statute and others. Accordingly, while both the Illinois statute and the New York statute prohibit a brewer from terminating an agreement with a wholesaler without good cause, the reach of the statutes are dramatically different. In Illinois a sub-distributor enjoys statutory protection against termination by a master distributor but in New York it does not.

This dichotomy raises an interesting rhetorical question; why did New York choose to omit statutory protection for sub-distributors? The most obvious answer is that the drafters did not want to extend statutory protection to the “Home D’s” (the hybrid retail/wholesale licensees which we referred to earlier). If that was the goal, however, it certainly would have been less intrusive on the rights of New York wholesalers if the statute simply excluded the holders of “Home D” licenses from the definition of “wholesaler”. Just as Illinois included “master distributors” within its definition of “brewer” in order to assure sub-distributors statutory protection, by simply excluding “Home D licensees” from the definition of “wholesaler”, New York could have achieved its goal of excluding Home D’s from statutory protection. At the same time, New York could have preserved the statutory rights of its wholesalers that also engaged in sub-distribution by including, as did Illinois, “master distributor” within the definition of “brewer”. While one may speculate as to the reasoning or motivation of the drafters, the point here is simply that if you are engaged in sub-distribution it would be wise for you to determine what your rights are vis-à-vis the wholesaler from whom you purchase your product.

Don’t Forget Your Bundle of Rights.

If it turns out that you are a wholesaler engaged in sub-distribution in a state that does not recognize the rights of sub-distributors, do not despair. As we have written in previous articles, your agreement and your statutory rights are only a part of the overall bundle of rights that wholesalers possess. There are many other statutory and common law rights and remedies which may be available to you depending on the particular facts of your case. The key is knowing what your rights are – preferably before you enter into any sub-distribution agreement.