www.mwe.com

Boston Bruxelles Chicago Dallas Düsseldorf Francfort Houston Londres Los Angeles Miami Milan Munich New York Orange County Paris Rome Séoul Silicon Valley

Washington, D.C.

Alliance stratégique avec MWE China Law Offices (Shanghai)© 2016 McDermott Will & Emery. Les entités suivantes sont collectivement désignées "McDermott Will & Emery", "McDermott" ou "la Firme": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermottWill & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato et McDermott Will & Emery UK LLP. Ces entités coordonnent leurs activités viades contrats de prestations de services. McDermott bénéficie d'une alliance stratégique avec MWE China Law Offices, cabinet d'avocats distinct.

Breaking Up Is Hard to Do: How to Exit

Your Distributor Relationship

Craft Beverage Expo

May 20, 2016

Beth Hatef

McDermott Will & Emery LLP

Classification of products

Distilled spirits

Wine

Beer

Mead

– Treated as a type of wine

Cider

– Depending on alcohol content, treated under the Internal Revenue Code as “hard cider” (asubset of wine subject to a more favorable excise tax rate) or still/sparkling wine (depending oncarbonation)

– Federal law does not prohibit the labeling and marketing as “cider” of products that do not meetthe cider tax class

– In general, most states classify cider as wine or a special type of wine, but approximately 8states, mostly in the Eastern U.S., treat cider as beer or a special type of beer

Important terminology

Tied-house laws: Laws and regulations that prohibit orrestrict…

– Supplier and/or distributor ownership of retailers, and vice versa

– Supplier and/or distributor provision of money, free goods, or other“things of value” to retailers, subject to exceptions

Three-tier separations: Laws and regulations that prohibit orrestrict cross-ownership among all three “tiers” (i.e., tied-house plus separations between supplier and distributor)

Franchise laws: Laws and regulations that put substantialrestrictions on a supplier’s ability to terminate or not renew adistributor above and beyond ordinary commercial law

Repeal of Prohibition

The 21st Amendment repealed Prohibition in December 1933,

but it found a country still deeply ambivalent about alcohol

What emerged from repeal was the first heavily-regulated

industry, with a degree of control unheard of at the time

The second clause of the 21st Amendment authorized states

to control the traffic in alcohol within their borders

Contrary to popular myth, the 21st Amendment does not

require any particular regulatory framework (control v. open,

three-tier, etc.)

Repeal of Prohibition

Clause 2 of the 21st Amendment reflected a clear consensusthat a single national “solution” to the regulation of alcoholwas not possible or desirable

– What was acceptable in New York was not acceptable in Kansas

– Some states wished to remain “dry” immediately following Prohibition

While the framers of the 21st Amendment saw a role for thefederal government (and Congress soon enacted the FederalAlcohol Administration Act), much was left to the states

Distribution and retail sales, in particular, became theprovince of state law, subject to an overlay of general federalprinciples (antitrust, trademark, etc.)

Federal regulation of alcohol following

Prohibition

Congress enacted the Federal Alcohol Administration Act

(FAA Act) in 1935

The FAA Act created the federal regulatory framework we

know today (basic permits, COLAs, advertising mandatories,

etc.)

The FAA Act regulated trade practices between “industry

members” (producers, importers and wholesalers) and

retailers, but did not separate the upper tiers at all

State regulation of alcohol following

Prohibition

The states, too, needed to confront the question of how to

regulate the newly-legalized alcohol industry

A primary influence in drafting new laws came from Toward

Liquor Control, a treatise published in 1933 (just before

repeal)

– It advocated a strict “control” system for all distilled spirits, fortified

wines, and “strong” beers

– For table wine and “3.2 beer,” it favored a liberal licensing system

– In a license system, it favored “tied-house” (separate retailer) laws, but

never contemplated three tiers

Post-Prohibition evolution

The history of the system since repeal is one of remarkable consistency,with evolution, but few revolutionary changes

For most states, the post-World War II era saw the gradual enactments ofthree-tier separations, which turned the mandatory separation of retailersunder the tied-house laws into mandatory three-tier systems

California

– Current regulatory structure was largely codified in 1955 after Constitutionalchanges led to the creation of the ABC

– But surprisingly, California did not move much towards three-tier laws like mostother states

– This is not a “loophole”; it reflects the fact that after repeal, legal separationsapplied to “tied-house” issues only (i.e., keeping retailers separate), not betweenproducer and distributor

– Even today, California remains permissive towards brewers self-distributing andpermitting an in-state or out-of-state brewery to own a distributor (permissive forwineries too, but not as permissive for distillers)

The rise of franchise laws

Beginning around 1970, more than three decades after repeal,consolidation at the supplier tier led to state measures – the“franchise laws” – designed to equalize bargaining power betweenlarge national brewers (and in some cases, wineries anddistilleries) and locally-based wholesalers

These laws are not the same as general franchise laws, present inabout a third of the states (including California) and enacted toprotect franchisees from franchisors (like McDonald’s)

A central assumption of such laws was that suppliers were muchlarger than wholesalers, requiring special unwaivable protectionsthat contract law and other commercial law principles did notprovide

Given the (presumed) disparity of bargaining power, franchise lawsprovide protection above and beyond the contract law principlesdeemed adequate to protect most commercial parties

The rise of franchise laws

The first alcohol-specific franchise law (applying to beer,

wine, and spirits) appeared in Massachusetts in 1971

Beer franchise laws, in particular, rapidly gained traction with

state legislatures in the 1980s

– The Beer Institute’s predecessor, The U.S. Brewers Association, even

supported “model” legislation that became the basis for the franchise

law in states like Michigan and Texas

By the mid-1990s, most states had enacted a franchise law

California and a few others (e.g., Colorado) resisted the trend

Franchise laws today

Today virtually every jurisdiction has enacted a beer franchise

law, with most coming into existence in the 1970s-1990s

– California is a “quasi-franchise” state

– No beer franchise law in Alaska, the District of Columbia, and Hawaii

Few of these statutes addressed their application to small

brewers when they were enacted (but some since have)

For wine and spirits, franchise law enactment has slowed,

and even reversed, in many places (e.g., Arizona, Illinois,

Washington wine)

Beer franchise laws

KEY:

Green – No beer franchise law

Yellow – Franchise law with small brewer exception, etc.

Red – Strong beer franchise law

Wine franchise laws

KEY:

Green – No wine franchise law

Blue – “Reverse” franchise law

Yellow – Franchise law with small winery exception, etc.

Red – Wine-specific franchise law

Pink – No exclusive agreements allowed

Grey – Control state for wine

Spirits franchise laws

KEY:

Green – No spirits franchise law

Blue – “Reverse” franchise law

Yellow – Franchise law with small distiller exception, etc.

Red – Spirits-specific franchise law

Grey – Control state for spirits

KEY:

Green – No franchise law

Blue – “Reverse” franchise law

Yellow - Franchise law with small supplier exception, etc.

Red – Franchise law

Pink – No exclusive agreements allowed

Grey – Control state for cider

Cider franchise laws

Franchise laws – typical provisions –

restrictions on termination

Restriction of a supplier’s ability to terminate or refuse to renew an

agreement with a wholesaler

– Generally supplier must possess “good cause” or “just cause” before terminating

– Supplier bears the burden of proving good cause

– Supplier typically may only terminate for cause after notifying the wholesaler

(often 60-90 days before termination) and giving an opportunity to “cure”

– Supplier may terminate immediately only upon certain extraordinary events, such

as wholesaler fraud, criminal conviction, bankruptcy, etc.

– Termination or disapproval in violation of the franchise law can be remedied by

injunctive relief and/or a damage award including goodwill/fair market value

In practice, terminating a wholesaler in a franchise state is almost

always costly and expensive, and is sometimes nearly impossible

Franchise laws – typical provisions – other

supplier restrictions

A supplier cannot “unreasonably” disapprove of or withhold consentto a wholesaler’s change of ownership

– Often no right to disapprove a sale to designated family membersuccessors

A successor supplier (buyer, new importer, etc.) is often bound toappointments made by the prior supplier

– Some states permit termination with compensation in this situation

Some franchise laws require suppliers to give brand extensions ornew brands to existing wholesalers

Franchise laws restrict suppliers from a variety of actions, such as

– Requiring mandatory contributions to a supplier-controlled marketing fund

– Restricting “rights of association” (i.e., no retaliation)

Franchise laws – typical provisions

Franchise law provisions often expressly supersedeconflicting provisions in a written agreement

Either in the franchise law or elsewhere, the majority of statesrequire exclusivity and prohibit “dualing”

In some states, an administrative body (i.e., the state’s ABC)serves as the initial decision-maker for disputes and/or mustapprove any change in distributors

– Not surprisingly, ABC decisions often favor in-state distributors

Some states create an expedited mechanism for arbitratingdisputes that are limited solely to damages/compensation

Franchise laws – the question of “cause”

Aside from extraordinary (and rare) events like bankruptcy of

the wholesaler, a criminal conviction, etc., cause is rarely

defined with precision

Instead, most franchise laws describe cause as an uncured

breach of a material obligation placed on the wholesaler by

the supplier

– Case law can sometimes shed additional light on what constitutes

cause

– But in most states, the issue of cause is left to the “trier of fact”

(whether court, state ABC, or arbitrator) – and remember the supplier

usually carries the burden of proof