By: Louis J. Terminello, Esq.
I’ve written more than a few times about the strength of the distributor tier in the three-tier system of alcohol distribution. In most states, distributors are powerful business forces that historically have used the legislative floor (and the courtroom) to accomplish business objectives. One, legal concept, codified in the Beverage Laws of many states, including Florida, are referred to as “franchise laws.”
Franchise laws protect alcohol beverage distributors and prevent their suppliers from terminating distribution contracts unless good cause is shown, among many other requirements. Franchise laws exist for every commodity type (malt, wine and spirits) and states may apply these laws to one or all drinks types. In addition to good cause there are often strict notice requirements and opportunity to cure provisions, with specified durations and timelines, that must be adhered with to have adequate grounds to terminate.
The Florida franchise law exists for malt beverage only and is codified in Florida Statute 563.022 entitled “Relations between beer distributors and manufacturers. Click here to read the statute in its entirety but a cursory review will highlight that the law heavily favors the distributor. It’s worth noting that all sorts of brands that a beer distributor obtains the rights to distribute will likely be controlled by this statute. I notably point out to suppliers who may be reading this that alcoholic seltzers, whether brewed from malt or derived from sugar cane may fall squarely within the confines of this statute.
Interestingly, franchise laws do not only protect distributors from supplier’s potential breach. It is worth noting that distributors are not immune to cannibalistic behaviors-that is one distributor poaching a brand from another. In the real-world marketplace, there are times when supplier (brand owners), when sitting at the distributor conference table, tacitly or even expressly agree to these brand acquisition attempts. If good cause is absent, the penalties can be quite high in franchise markets.
This November, a Missouri jury awarded 11.75 million dollars in damages to the distributor of the famous Jägermeister brand for violation of that states franchise laws as applied to distilled spirits. Mast-Jägermeister US, pulled the ubiquitous beverage from its then current distributor, Major Brands, and turned the drink over to Southern Glazer Wine and Spirits’ Missouri operation as part of the company’s efforts to consolidate distribution of “Jager” across multiple markets. Major Brands brought suit in federal court which included numerous counts, in addition to violation of the franchise statute, against the brand owner and SGWS including tortious interference of a business relationship. Ultimately, the jury awarded damages in the amount of almost 12 million dollars, including attorney’s fees and costs.
This case illustrates the importance of franchise acts to distributors in every state and the potential for the recovery of significant damages for not adhering to the statutory terms. As a caveat to suppliers, everywhere, a thorough analysis of a state’s franchise laws in the context of business goals and the comport of contractual terms to these statues is essential. An underperforming distributor can be very bad for business. Violation of a states franchise laws without good cause can be the death knell of a brand.
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