TERMINATING YOUR WHOLESALER DUE TO THEIR FAILURE TO USE “BEST EFFORTS”

Law Offices of John P. Connell, P.C.: Alcoholic beverage manufactures such as instate and out-of-state breweries, wineries and distilleries are familiar with the Massachusetts “franchise law” that prohibits a manufacturer from (ever) terminating its established wholesaler unless it can prove “good cause” for doing so at the ABCC. Pursuant to G.L. c. 138, § 25E, there exists 5 separate grounds which – if proven – qualifies as “good cause.” One of those stated reasons is if a wholesaler fails to exercise its “best efforts” to promote sales of a particular brand. Under the law, however, what needs to be shown in order to prove a wholesaler has failed to use its “best efforts”?

Under general contract law in Massachusetts, courts have interpreted so-called “best efforts” clauses in contracts as “requiring that the party put its muscles to work to perform with full energy and fairness the relevant express promises [in the contract] and reasonable implications therefrom.” Macksey v. Eagan, 36 Mass. App. Ct. 463, 472 (1994).   Again, what does that mean though within the context of a manufacturer experiencing disappointing sales and questions about its wholesaler’s efforts to promote its brand?

The leading decision at the ABBC on this particular issue remains the 1993 decision rendered in In Re: Burke Distributing Corp. v. Guinness Import Co., ABCC Decision dated February 27, 1993). In Burke, the brand owner for such powerful brands as Guinness Stout, Harp Lager and Bass Ale sought a finding at the ABCC that its MA wholesaler, Burke Distributing Corp., had not used its “best efforts” to promote the sale of these brands. The parties had no written contract and the brand owner was relying on the “best efforts” provision in Section 25E to seek termination of the parties’ distribution relationship. While the ABCC found for the wholesaler, Burke Distributing, some issues are worth addressing as they are not un-common issues in today’s market where in-state manufacturers have grown ten-fold in recent years while wholesalers have seemingly shrunk in numbers through consolidations.

In Burke, the brand owners complained that “Burke continuously and chronically failed to properly promote the Guinness products, that Burke falsified records, that there widespread retailer complaints about Burke’s performance, that Burke unfairly preferred Miller and Sam Adams products in sales efforts, and that Burke breached its contractual obligations to Guiness.” The ABCC held, however, “[n]one of these contentions is supported by the credible evidence in the record.”

With regard to that “evidence,” Guinness introduced raw statistical evidence that showed in one of the previous years, its national sales were up by 10.45% but its Massachusetts’ sales were down by 1.6%. The ABCC found that “although a sharp drop in sales can be evidence of an inadequate sales effort, product sales are subject to many factors other than the seller’s level of effort.” The ABCC found some of those factors to include: (1) the difference between the Massachusetts economy and the national economy; (2) the fact that Massachusetts was a “saturated” beer market; (3) the fact that alcoholic depletion statistics are not always precise in accuracy; and (4) wholesalers in other states may have had the brands longer and/or may not carry all of the brands or perhaps did not carry other competing brands, therefore skewing the statistics.

Finding the statistical evidence of declining in-state sales compared with growing out-of-state sales was inadequate in this case to show a failure to use “best efforts,” the ABCC also held that a wholesaler possesses a wide degree of “reasonable business judgment” when it comes to how to sell a brand, and its mere refusal to follow the instructions or recommendations of a manufacturer on how to best promote their brand does not itself constitute good cause for termination. “Indeed,” the ABCC held, “Massachusetts’ policy is that wholesalers not be controlled by suppliers.”

With regard to its claims that Burke preferred other brands such as Miller over Guinness brands, the ABCC again held for Burke, stating “[i]t was obvious that as a multi-line wholesaler, at any given time Burke might emphasize one product line over another; such emphasis does not constitute unfair preferment.”

In short, many of the common place complaints one hears today relating to a wholesaler’s performance is couched in terms of flat or declining sales, or the perception (whether real or not) that a wholesaler is preferring other brands over a manufacturer’s particular brands. Such general complaints, at least under the facts of the Burke decision, were found inadequate as evidence to prove a failure to use “best efforts.”

However, every case is different and is defined not only by its own factual record, but what evidence is presented at an ABCC hearing and how it is presented. It should be noted that the factual evidence presented by Guinness’ witnesses in the Burke decision was found by the ABCC to be “largely self-serving, was fraught with bias and exaggeration, was at times contradictory, and in some instances flatly not credible.” In other words, the case for “good cause” to terminate was not presented well.

Two things could have made this decision turn out differently: a well presented case with actual evidence to support underlying claims that sales were flat or declining for a reason, or a well drafted Distribution Contract that addressed from the start what the parties’ performance obligations and expectations, including agreed upon sales’ milestones and under what factual events a wholesaler may be terminated without having to prove at the ABCC that, in general, a wholesaler has failed to use its “best efforts” to promote sales of a brand.

August 2017

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