Issue link: http://winesandvines.uberflip.com/i/708909
August 2016 WINES&VINES 69 PRACTICAL WINERY & VINEYARD BUSINESS On the positive side (for a winery), many franchise states include in their definition of "cause" or "good cause" a distributor's failure to comply with an important and reasonable requirement by a supplier. 2 A written agreement, signed by the dis- tributor, that defines such important and reasonable requirements will support a sup- plier's termination for good cause if the distributor has failed to meet one or more of these requirements. For example, the Liquor Control Code in Michigan (a franchise law state) provides that a supplier may not terminate or fail to renew a distribution agreement unless it has good cause, including "failure by the wholesaler to comply with a provision of the agreement, which is both reasonable and of material significance to the business relationship." 3 Without a written agreement defining the obligations that are of "reasonable and mate- rial significance," a court would likely look to Michigan's franchise law itself to deter- mine whether a distributor's performance was so substandard as to justify termination. Here the law requires only that the distribu- tor devote "reasonable" efforts to sales and distribution of the products and maintain "reasonable" sales levels. 4 Most suppliers would find it difficult to prove a distributor's performance fell short of these mediocre requirements absent an egregious lapse of effort by the distributor. However, a precise definition of what con- stitutes reasonable performance in a written agreement will provide the winery with le- verage in resolving distributor conflicts in Michigan. As another example, Massachusetts pro- hibits a supplier from terminating a distribu- tor without good cause, which includes the distributor's "failure to comply with the terms of sale agreed upon between supplier and wholesaler." 5 Massachusetts case law, moreover, sup- ports the finding of good cause when a dis- tributor violates a material provision of its written distributor agreement—even if the conduct would not be considered good cause for termination in the absence of such con- tractual provision. In Seagram Distillers Co. v. Alcoholic Beverages Control Commission, for example, a termination was upheld when the distributor's sole shareholder sold all of his stock to another party and a clause in the distributor agreement allowed either party to cancel "upon the (s)ale or transfer of control or management of the other party." While the court found good cause in the cancellation provision of the written agree- ment, the court found no good cause for termination of additional oral agreements between supplier and distributor, because these oral agreements lacked the express written requirement of consent to a change of control that was included in the written agreement between the parties. 6 Thus, while the distributor's change of control in and of itself would not have constituted good cause in the court's judgment, the violation of a written contractual provision forbidding such change of control was found to constitute good cause. 7 As you can see, a written distribution agreement that defines such important and reasonable requirements as failure to meet sales goals mutually agreed upon by the winery and the distributor will support a supplier's termination for good cause when the distributor has failed to meet one or more of these requirements. Other key provisions in distribution agreements A written distribution agreement can provide many important terms in addition to enumerat- ing the distributor's performance obligations. These are terms that would not automatically apply to the relationship in the absence of a written agreement specifying them. In fact, franchise state distributors frequently object to signing written distribution agreements—not because the agreement is contrary to a state's franchise laws, 8 but because the distributors know the agreement could minimize the pro- tections afforded them by their franchise laws. As in the Seagram Distillers case, many courts will hold the distributor to such written terms (so long as they do not violate their state's franchise laws), even if the provision would not apply absent a written agreement. One example is a dispute-resolution pro- vision. Binding arbitration is of much greater advantage, particularly to small suppliers, than the far more costly litigation route that a contract will default to in the absence of a dispute-resolution provision. This becomes an important protection in the event the distributor refuses to accept a supplier's notice of termination and pursues a claim. Other key components of a written distri- bution agreement include: Territory carve-outs: These make clear that the distributor's right to distribute is limited to those territories listed in the agreement and no others. Many multi-state distributors include in their agreement the right to any future territories in which the supplier sells its products. New suppliers just launching in a single state are particularly vulnerable to this provision. Brand limitations: While a distributor's franchise rights almost always travel with the "brand" (that is, if a supplier sells a "brand," the successor-owner of that brand is bound to the same distributor in that state) most of these states have notoriously fuzzy definitions of what constitutes a "brand." For suppliers with multiple brands that do not necessarily all carry the name of a particular winery, the distribution agreement should specifically list which brands the distributor has a right to distribute. This leaves open the option to grant future brand rights to different distributors in that state. Under Maine law, 9 for example, a supplier may not appoint more than one distributor in any territory "for its brand or label in the same territory." 10 KEY POINTS A distribution agreement should track the language of that state's franchise laws and make clear that performance failures con- stitute good cause to the extent allowed by that state's laws. Be aware that any agreements that violate state franchise laws are not enforceable. Use meeting evaluation forms to track per- formance. Sales force training is a must. LET THE BUYER BEWARE I t is important to note that any written agreement is not necessarily superior to no agree- ment in franchise states (or any state for that matter). More often than not, distributor- drafted distribution agreements include provisions that tie up the supplier's brands (in- cluding any future brands and often future territories) in perpetuity, omit any performance requirements, deny the supplier any right to terminate—not just for a distributor's failure to perform, but often for any reason at all—and include termination penalties of multiple times the distributor's gross profit. With these kinds of agreements, a supplier may be better off relying on the paltry protec- tions afforded by that state's franchise law rather than giving away those meager protec- tions under the terms of the distributor's version of a distribution agreement. This will depend on the agreement and the laws of the applicable state. We recommend wineries consult legal counsel to help them determine how to proceed under these circumstances.