Wines & Vines

September 2017 Distributor Market Issue

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44 WINES&VINES September 2017 DISTRIBUTOR MARKET 2017 O ne of the most common questions I get from winery clients is: "My dis- tributor (in a franchise state) has no incentive to sell my brands, and he knows I can't fire him. Do I have any lever- age at all?" This is a valid question: Is there anything a winery can do to encourage performance from a distributor in a franchise state? Failing that, can the winery terminate the relationship? Written distribution agreements I recently exchanged emails with a winery executive who was entering the market in a franchise law state and preparing to appoint a new distributor. I asked my customary thresh- old question: "Do you have a written agree- ment for the distributor?" The executive replied, "No. Isn't an agreement worthless in a franchise state?" This is a typical response from wineries experienced enough to know the nightmare that is alcoholic beverage franchise law, and the simple answer is "NO," although there is admittedly a more nuanced response, depending on the state in question. The fact is that a written agreement, prop- erly drafted to respond to the specifics of a particular state's franchise laws, is usually the supplier's only leverage against distributor "deck-stacking," which occurs in states with alcoholic beverage franchise laws. Good cause termination Let's start with a basic premise. All franchise states allow a winery to terminate its relationship with a distributor for "cause." Some franchise states define the universe of what constitutes cause under that state's laws. Other states provide examples that are not an exhaustive list, while still other states give no guidance at all. Some of the more unfriendly states have very narrow definitions of cause and even go so far as to state that cause does not include a distributor's failure to meet any particular goal or quota. 1 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 distribu- tor, that defines such important and reasonable requirements will support a supplier's termina- tion 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 sig- nificance 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 egre- gious lapse of effort by the distributor. How- ever, a precise definition of what constitutes reasonable performance in a written agree- ment will provide the winery with leverage in resolving distributor conflicts in Michigan. As another example, Massachusetts prohibits a supplier from terminating a distributor with- out 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, supports the finding of good cause when a distributor violates a material provision of its written dis- tributor agreement—even if the conduct would not be considered good cause for termination in the absence of such contractual provision. In Surviving Distributor Power Plays Knowing your rights and protecting your brand in a franchise state By Suzanne DeGalan EDITOR'S NOTE This article first ran in the August 2016 issue of Wines & Vines. It is the sec- ond installment in a two-part series about franchise laws by attorneys Suzanne DeGalan of Hinman & Carmi- chael and John Trinidad of Dickenson, Peatman & Fogarty. Trinidad's article, "Why Producers Hate Franchise Laws," appeared in the April 2016 is- sue of Wines & Vines. Franchise laws add another wrinkle to the already complicated three-tier system.

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