BEER INDUSTRY PLAYERS SEEK COMPETING AMENDMENTS TO MASSACHUSETTS FRANCHISE LAW

Law Offices of John P. Connell, P.C.: Massachusetts General Law Chapter 138 § 25E provides that any manufacturer of alcoholic beverages that makes regular sales of its branded products to a wholesaler for a period of six months or longer has entered into a binding agreement with that wholesaler for that particular brand that can only be terminated by the manufacturer for “good cause.” Proving “good cause” at the ABCC can be difficult and it generally does not include a manufacturer’s disappointment with a distributor’s sale performance of its brands. Otherwise, this so-called state mandated “franchise agreement” has an indefinite term that many manufacturers, such as craft-beer makers in particular, argue do not support their best interests, but rather restricts their ability to change wholesalers as they grow or as the wholesaler may be deemed ineffective at promoting the brands sold to it by the breweries.

For these reasons, Section 25E has been targeted for reform in the legislature by the brewers over the last several years but past efforts in this regard have proven ineffective when met with the opposition the Massachusetts Beer Distributors’ lobby, led by the charismatic William Kelley, Jr., former General Counsel of the ABCC. In past legislative battles over Section 25E, the Beer Distributors have argued that Section 25E protects the work of a distributor in building-up a brand over time, and that it would be unfair for a brewery to be able to simply walk away from those efforts and retain the value added to the brand by the distributor without showing “good cause.”

In the current Session of the Legislature, knowing that Section 25E will be under assault again, the Beer Distributors launched their own preemptive effort at amending Section 25E by rallying around House Bill HD 3525, a Bill that seeks to amend § 25E by keeping much of the old statute but now allowing breweries that produce less than 30,000 barrels a year to terminate their relationship with their wholesaler “without good cause,” but only provided that brewery pay the “fair market value” of those distribution rights to the terminated wholesaler. Any disputes as to the “fair market value” of those distribution rights would be settled in binding arbitration and the distributorship could not be terminated until the wholesaler is actually paid that amount, which may not be until the arbitration proceeding is completed or after any appeals to Court should the parties not otherwise agree on a price or accept the arbitrator’s decision.

Interestingly, House Bill H 3525 also adds a new section to G.L. c. 138, a proposed Section 79, which provides that if any section within all of G.L. c. 138 is determined by a Court to be inapplicable to “any person or circumstance,” or is otherwise determined to be “invalid or unconstitutional” by a Court, than the remaining provisions of G.L. c. 138 shall be construed by the Court “in accordance with the intent of the legislature to further limit rather than to expand commerce in alcoholic beverages, [and] to enhance strict regulatory control over . . .the three-tier regulatory system imposed by the Massachusetts liquor control act upon all alcoholic beverages including malt beverages.” (Emphasis added.)

In other words, if there were any legal challenge to the new proposed amendment to Section 25E, or any other existing provision of G.L. c. 138 for that matter, the Courts would under this new proposed Section 79 be instructed to interpret the dispute in favor of stricter regulatory control by the state and consistent with the regimental three-tier system, and against what are arguably the existing rights of private parties to contract around the terms of Section 25E and therefore expand commerce.

In the other corner of this coming legislative battle is the Massachusetts Brewers Guild, an industry force comprised of over a hundred breweries in Massachusetts and now led by the innovative Rob Burns, one of the owners of Night Shift Brewing in Everett. The Brewers Guild is now supporting two separate Bills in the Legislature: Senate Bill SD 1687 and House Bill HD 1319.

In Senate Bill SD 1687, this proposed new law would eliminate 25E in its entirety as it relates to any in-state or out-of -state breweries, and would allow “contract law” instead of the provisions of Section 25E to govern the relationship between breweries and wholesalers. Interestingly, this proposed Bill would not apply to other smaller manufactures of alcoholic beverages, such as small wineries, distilleries or the makers of “hard cider,” seeming allies in this dispute, and would only allow breweries to be excused from the dictates of Section 25E.

In House Bill H 1319, the other legislation supported the Brewers Guild, this new proposed law would allow again just breweries to terminate their distribution agreement with a wholesaler pursuant to the parties’ contractual terms or, in the absence of a contract, provided that: (1) the brewery makes up less than twenty-percent (20%) of the wholesaler’s global sales from the previous year; and (2) the succeeding wholesaler pays the first wholesaler the “fair market value” of the distribution rights previously granted the first wholesaler by the brewery.

Unlike House Bill HD 3525, supported by the Beer Distributors, however, House Bill HD 1319 authorizes the brewery to terminate continued shipments to the first wholesaler regardless of whether the first wholesaler is paid for these distribution rights or not, and the obligation to pay for these distribution rights is shifted to the succeeding distributor, and is not the financial obligation of the brewery. Any disputes as to the “fair market value” of the distribution rights between the two wholesalers are to be resolved by binding arbitration.

In the mix over the current debate over dueling proposed amendments to Section 25E, however, is the effect on current contractual relationships between breweries and wholesalers, who have been largely allowed to negotiate their own contractual terms that will govern their distribution arrangement. Currently, Section 25E, itself, provides that “good cause” for termination exists when there is a “failure to comply with the terms of the sale agreed upon between the supplier and wholesaler.” G.L. c. 138, §25E (a)(5). Moreover, Courts have held and the ABCC has recognized that a party’s freedom to contract includes the right to supersede the “good cause” provisions of Section 25E:

“The parties both agree that they were free to contract for the termination clauses they mutually agreed upon, which supersede the “good cause” termination limits found in M.G.L. c. 138, § 25E. Indeed, ‘[a] cancellation clause represents a reasonable method by which suppliers and wholesalers alike may protect their freedom to choose with whom they will deal. We comprehend nothing in the language or intent of § 25E which acts to countermand that contractual freedom.’ Seagram Distillers Co. v. Alcoholic Beverages Control Comm’n, 401 Mass. 713, 717 (1988).”

ABCC Decision No. 25E-1321, In Re: K.T. Liquor Wholesale, Inc. (dated October 28, 2015).

While some provisions of G.L. c. 138 cannot be contravened or contracted around because they are premised on public safety or public policy, such as was the case in Beacon Hill Civic Assn. v. Ristorante Toscano, Inc., 422 Mass. 318, 321 (1996), the Courts have not viewed Section 25E as embodying any such important public safety or policy considerations: “[w]hile the original intent of G.L. c. 138 (minus § 25E) was to protect the public from the evils of intemperance through the regulation by license of the production, distribution, and the sale of alcoholic beverages, the enactment of § 25E in 1971 had but a tenuous connection to this intent and appears more grounded in a theory of antitrust.” Capital Distributing Co., Inc. v. Heublein, Inc., 50 Mass. App. Ct. 339, 342 (2000) (reversed on other grounds). See Frishman v. Maginn, 75 Mass. App. Ct. 103 (2009).

Accordingly, the passage of anyone of the above referenced Bills may have an effect on existing relationships between distributors and brewers to the extent those parties have taken or not taken the opportunity to reduce those relationships to a written contract. Over the years, many distributors and suppliers have simply entered into their “franchise agreement” without a written contract and continue to be governed strictly by the terms of Section 25E. Other parties over the years have entered into written Distribution Agreements that provide for termination rights separate than those set forth in Section 25E or incorporate some provisions of Section 25E.

In theory, anyway, Senate Bill SD 1687, supported by the breweries – which eliminates the provisions of Section 25E with regard breweries and instead defers all existing and future relationships to “contract law”- would seemingly free any brewery not bound by an existing contract to immediately terminate its wholesaler without any penalty or financial obligation for doing so. With regard to House Bill 1319, also supported by the breweries, breweries with existing contracts – made at a time when Section 25E was in full force and affect and perhaps even referenced therein – would be seemingly bound to those contracts regardless of whether or not they comprised twenty-percent (20%) of a wholesaler’s global sales. Breweries entering into written contracts in the future, on the other hand, could in theory anyway contract around the “fair market value” requirement to be paid by a successor wholesaler, as would be required under this new version of Section 25E.

With regard to House Bill HD 3525, on the other hand, there is no express deference to either existing or future contractual relationships but rather an added express Legislative “intent” behind this provision that the Courts should interpret these laws to “further limit rather than to expand commerce,” and therefore the current autonomy of the parties to contract separately from what is provided in Section 25E may be curtailed or even eliminated.

All these pending Bills therefore may have some consequence intended or not on the existing contractual relationships manifested in the existing Distribution Agreements of many participants in the beer making and distribution industry in Massachusetts. The full consequences of which may have to be determined in Court should this regulatory landscape change later this year.

(c) Law Offices of John P. Connell, P.C.

February 14, 2017

 

 

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