Issue link: http://winesandvines.uberflip.com/i/708909
70 WINES&VINES August 2016 BUSINESS PRACTICAL WINERY & VINEYARD The Maine Act does not define the word "brand," creating ambiguity as to whether wineries may appoint different distributors in the same territory for different "brands" owned by the same winery. Happily, in this case, a federal court case has established that "brand" under the Maine Act refers to a single label, or "item," rather than a manufacturer's entire line of products. In Briggs Inc. v. Marlet Importing Co. Inc., 11 the court found under the Maine Act that "Molson Ice" was a separate "brand" from Molson Breweries U.S.A.'s other products, such as Molson Ale and Molson Light, thus giving Molson Breweries the right to grant distribution rights to its new product, "Molson Ice," to a new distributor in the same Maine territory where another distributor was dis- tributing other Molson products. Note that this is not a typical result in a franchise state—usually the brand name "Molson," as part of the name of both prod- ucts, would be enough to constitute the same brand. This is why completing due diligence by reviewing the particular state's franchise laws (in this case, including case law) is al- ways a best practice. Exclusivity (dualing): Some franchise states allow a supplier to grant distribution rights to more than one distributor for a p a r t i c u l a r t e r r i t o r y ( w h i c h s o m e t i m e s means the entire state). In some states, this law must be taken advantage of at the out- set of the relationship, since any later addi- tion of another distributor to the same territory could be interpreted by the state as a material impairment or diminishment of the existing franchise, triggering the distributor's right to compensation for its "loss" of distribution rights. In those states that allow it, therefore, the agreement should specify that the appointment is "non- exclusive" in order to leave the supplier's options open to grant future rights in the same territory to other distributors. Liquidated damages: Yes or no? As noted above, distributors willing to enter into written agreements usually want to in- clude a liquidated damages (or "termination fee") provision for any supplier termination without cause. Usually the fee will be ex- pressed as a multiplier of the distributor's gross profit from sales of the brand ranging from one to as much as five times or more gross profit. A termination fee is not neces- sarily a bad thing, as it provides the supplier with certainty regarding the cost of exit. In fact, a termination-fee provision is often preferable to relying on the state's franchise law, which often requires suppliers to pay the terminated distributor "fair market value," a notoriously ambiguous phrase that encourages litigation. We recommend consulting with your coun- sel and checking that state's franchise laws prior to agreeing to a fee. We generally insist upon no more than one times gross profit when negotiating these provisions, but the amount of a reasonable liquidated damage fee varies both state by state and by supplier volume of sales within the state (higher vol- umes generally translate to lower liquidated damage multiples). Monitor relationship Track performance: Suppose you are suc- cessful in getting a franchise state distributor to sign your agreement. The agreement tracks the language of that state's franchise statutes regarding good cause and allows for termina- tion in the event of failure to perform. Does this guarantee you can terminate a non- performing distributor, provided you are willing to diligently follow the franchise state's requirements regarding notice, op- portunity to cure and so on in the event of distributor performance failure? By no means. The right to terminate a distributor for failure to perform is meaningless unless the winery tracks the distributor's performance. The most common mistake suppliers make regarding distributor relationships in fran- chise or open states is to relax their vigilance once the distributor has been appointed and fail to keep a paper trail of the distributor's performance, communications with the win- ery, sales and depletion efforts, promotional activities and the like. While it is true that distributors are loathe to commit to depletion numbers and may often refuse to do so, wineries can still es- tablish systems for tracking performance, require regular sales and depletion reports, schedule at least quarterly meetings with distributors (including at least one face-to- face meeting annually) in which both sides agree to certain sales and promotional efforts and—above all—put everything in writing. A distributor meeting evaluation form is vital for this purpose (our firm routinely provides such forms to our clients for this reason). Emails can be critical in this regard; they can be your best friend or your worst enemy when it comes to tracking distributor perfor- mance in the event of a dispute. We have many suppliers who come to us with tales of distributors who are ignoring their brands, avoiding their phone calls and generally foreclosing any opportunity for achieving the winery's sales goals in that territory. But when we begin to collect the paper trail of the relationship, frequently we find emails in which the winery has compli- mented the distributor on its performance, failed to note distributor deficiencies and let slide opportunities for pointing out weak- nesses in performance. In these cases, the email correspondence has generally weak- ened if not seriously undermined the win- ery's case for termination with cause in that territory. Watch for termination opportunities Certain situations or events can create "ter- mination opportunities," even in franchise law states. Sale of distributor: Franchise laws that address the sale of a distributor to another distributor generally state that the brands follow the sale. However there is often a window of opportunity in many franchise states, because the distributor is required by PRE-SIGNED RELEASES AND WAIVERS I t is not uncommon for winery clients to come to us with the "perfect solution" to entering into a distribution relationship in a franchise state: Simply get the distributor to sign, in advance of entering into the relationship, a waiver stating the distributor agrees that supplier may terminate distributor at any time without penalty. What many suppliers do not realize, however, is that franchise state laws prohibit the dis- tributor from contractually waiving any of the rights it has under the franchise laws. Any sort of written waiver stating otherwise might simply be void under the applicable state's laws. In fact, in many cases the distributor is well aware of this and knows the waiver will likely be unenforceable when the supplier attempts to terminate. Thus this "perfect solution," if unenforceable, actually leaves the winery worse off than if there was a written agreement in place defining essential terms. The right to terminate a distributor for failure to perform is meaningless unless the winery tracks the distributor's performance.