Law Offices of John P. Connell, P.C.: In general, wine distribution laws in the United States are broken into three categories: those for franchise states, non-franchise states, and control states. Every state in the U.S. is considered an independent sovereign when it comes to the distribution of alcoholic beverages. For this reason, nationwide distribution of wine requires a familiarity with the laws of all fifty states (and even some individual counties within those states).
Franchise and Non-Franchise States:
When a winery ships a branded product to a particular wholesaler or distributor in a “franchise state,” as a matter of law a “franchise” arises between the winery and the wholesaler in regard to that shipped brand. This means that after a winery merely ships a brand to a wholesaler, the winery can never terminate the wholesaler with regard to that brand, even if the parties never discussed or contracted for such a result. The wholesaler may only be terminated under certain exigent circumstances, or when the cause is “good” or “just.” Yet, proving a “good” or “just” cause can be difficult in most cases and often requires a level of fault to fall on the wholesaler. For example, a wholesaler’s adequate effort to sell a winery’s product will be insufficient for termination, while a wholesaler’s failure to pay invoices or a wholesaler’s insolvency may be enough.
Accordingly, sluggish sales of a brand by a seemingly non-interested existing wholesaler, on one hand, and the potential for better sales from another eager wholesaler, on the other hand, will result in a difficult dilemma for a winery in a “franchise state.” Terminating the poorly performing existing wholesaler may lead to litigation or penalties imposed by the state’s alcoholic beverage compliance office. For all but the most egregious circumstances, wine franchise laws generally require the winery to provide written notice of up to 90 days prior to termination of a wholesaler and even then give the wholesaler an opportunity to “cure” the alleged deficiency that led to the termination. Immediate termination is usually limited to the most serious of circumstances, including wholesaler fraud and bankruptcy.
Massachusetts is a “franchise state” pursuant to G.L. c. 138, § 25E and there are approximately 22 other “franchise states” in the United States. In many “franchise states,” written contracts do not allow the parties to contract out of the franchise protections afforded by state statutes. Accordingly, a winery should be aware of such restrictions before entering into any particular state distributorship contract. In “non-franchise” states, termination generally may be done at will, however, “reasonable notice” of about 30 or 60 days may be imposed.
There are two issues that may either complicate or aid a winery’s decision as to whether or not to go ahead with potential litigation arising from the termination of a wholesaler in a “franchise state”: the first is “dualing” and the second is “brand determination.”
In some “franchise states,” a winery can provide a branded product to a second wholesaler after a franchise has arisen between it and a primary wholesaler. This process, known as “dualing,” occurs when a brand is provided to “dual” distributors. Some “franchise states” permit dualing, while others do not. In Massachusetts, dualing a particular brand is permitted provided that shipments to the first wholesaler are not “materially curtailed” to less than 110% of that distributor’s most recent highest annual shipment order (by weight).
A second reprieve to wineries suffering poor performance by an under-performing wholesaler is known as “brand determination.” Recall that some “franchise states” limit the termination of a wholesaler when a particular brand has been shipped to that wholesaler. The question thus arises for a winery wishing to terminate a wholesaler: is the new wine brand being sold the same as the old wine brand? If not, no franchise ever arose in the first place.
Generally, local state alcohol beverage compliance boards and courts will not be persuaded that a brand sold for years under the same label name, with the same label design, from the same grape varietal, from the same vineyards and pursuant to the same vintering process will be regarded as a “different brand” should the winery change the label slightly in an effort to justify its “new wine in old bottles” attempt to circumvent the franchise laws. However, a winery that does change its label, design, grape varietal, vineyard and/or vintering process may have a good case that the brand it was providing to a wholesaler for many years is no longer the “same brand,” albeit similar and sold under the same “house name.”
Control States:
In so-called “control states” the state government has taken “control” over the distribution of wine into that state and it acts as the state’s wholesaler-distributor, selling wine at “state owned stores.” These states vary in the manner by which a winery can distribute its product into the state. In Utah, for example, the law provides that only one individual may decide which wine can enter the state. In Pennsylvania, a board decides which wine may enter the state. In these control states, many wineries will require the use of a “broker” to navigate through the distribution system, which will often times include affiliated semi-private wholesalers.
Unlike “franchise states,” “control states” do not result in one single private wholesaler creating a monopoly over a particular brand. Yet the private, profit-incentivized monopolist wholesaler is replaced with the public sector, “even playing field,” regulatory hand of local state government. In such states, there is no freedom of contract to try and make an agreement circumventing the risk of poor sales performance.
For the reasons noted, the aspiring distributor of wine should know the laws of each particular state before making a shipment of any product into that state. A little planning and foresight can go long way in avoiding problems down the road in so-called “franchise states,” “non-franchise states” and “control states.”
© Law Offices of John P. Connell, P.C., 2013.