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64 WINES&VINES April 2016 BUSINESS PRACTICAL WINERY & VINEYARD M edia attention descended on Missouri as Diageo geared up to do battle with one of the state's largest wholesalers, Major Brands, in 2014. The central topic: state franchise laws that make it dif- ficult for a producer to terminate a wholesaler relationship. The Wall Street Journal deemed this the "Missouri liquor wars," but much of the fanfare went away once the parties settled their dispute in September. What are franchise laws? Franchise laws come in many shapes and sizes, but all share one primary characteristic: They make it exceedingly difficult and costly for a producer to terminate a state wholesaler. States with some form of franchise law for wine include Alabama, Arkansas, Connecticut, Delaware, Georgia, Idaho, Kansas, Maine, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New Mexico, North Caro- lina, Ohio, Tennessee, Vermont, Virginia, Washington and Wisconsin (according to the Wine Institute). Wine Institute reports there are 21 states that have "monopoly protection laws" that include some sort of termination or good-cause provision. Such provisions are implied in any alcoholic beverage supplier-distributor agree- ment, including verbal and "implied in fact" agreements. Suppliers, therefore, need to be careful when they consider entering into a franchise law state that their words or actions will not lock them into a franchise agreement with distributors they are considering. Typically, states require that a producer have "good cause" to get out of a distribution relationship, but in practice, "good cause" has been narrowly defined by state regulatory agencies and courts, making it difficult for producers to terminate even for well-founded business reasons. For example, Virginia's franchise law states: "Notwithstanding the terms, provisions or conditions of any agreement, no winery shall unilaterally amend, cancel, terminate or refuse to continue to renew any agreement, or uni- laterally cause a wholesaler to resign from an agreement, unless…good cause exists." In 1989, a winery with multiple distributors throughout Virginia decided to consolidate the total number of distributors for efficiency purposes and issued a termination letter to a select number of its distributors. Some of the terminated Virginia distributors filed a complaint with the state Alcoholic Bever- age Control Board, claiming that the termina- tion violated the state's Wine Franchise Act. The parties asked the board to answer a simple question: Does the good faith exercise of business judgment by the winery, absent any evidence of deficiencies in the distributor's performance, constitute good cause for pur- poses of the franchise law act? The board found that it does not, that the winery had violated the state franchise law, and the Virginia Supreme Court affirmed this decision in 1996. This case demonstrates the excessively narrow reading of the "good cause" termination provision in franchise law states. Although some states offer exemptions to the application of franchise laws, those ex- emptions are also narrowly construed. Ohio, for example, allows for termination of a wholesaler agreement absent good cause when there is a transfer of ownership of a particular beverage alcohol brand so long as the distributor is compensated and given notice of the termination within 90 days of the transaction (often referred to as the "suc- cessor manufacturer" exception). But courts have consistently denied at- tempts by large beer companies, including Miller Brewing and Heineken USA Inc., from taking advantage of these exemptions to ter- minate Ohio distribution agreements. Terminating an agreement in a franchise law state can carry a heavy price tag. In North Carolina, a winery wishing to terminate a distributor in violation of state law may face suspension or revocation of its permit, an order suspending shipment of that winery's product into the state and a financial penalty ranging from $15,000 to $35,000. Other states including Delaware require that suppliers terminating a distributor rela- tionship provide the distributor with "reason- able compensation" for the value of the wholesaler's business related to the terminated brands. This is generally based on the average annual gross profits of those terminated brands. The excessively broad scope of franchise laws in certain states have forced producers to choose between continuing a distribution re- lationship that they wish to terminate or leav- ing the state altogether. Georgia, for example, requires producers to register each brand they sell in the state with the Department of Revenue's Alcohol & Tobacco Division and designate a state wholesaler with that brand. If the producer wishes to change distributors for that brand, it must file a "notice of intention" with the commissioner and serve a copy to the current wholesaler. The wholesaler Why Wine Producers Hate Franchise Laws A system designed for selling cars still applies to wine sales in many states By John Trinidad EDITOR'S NOTE This is the first installment in a two-part series about franchise laws by attorneys John Trinidad of Dickenson, Peatman & Fogarty and Suzanne DeGalan of Hinman & Carmichael. DeGalan's article about how wineries can protect themselves while engaging wholesalers in franchise states will appear in the June issue of Wines & Vines.