Issue link: http://winesandvines.uberflip.com/i/867389
September 2017 WINES&VINES 45 DISTRIBUTOR MARKET 2017 Seagram Distillers Co. v. Alcoholic Beverages Control Commission, for example, a termination was upheld when the distributor's sole share- holder 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 trans- fer 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 ter- mination 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 distribu- tor'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 agree- ment that defines such important and reason- able 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, fran- chise state distributors frequently object to sign- ing 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 protec- tions 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 provi- sion. Binding arbitration is of much greater advantage, particularly to small suppliers, than the far more costly litigation route that a con- tract will default to in the absence of a dispute- resolution provision. This becomes an important protection in the event the distribu- tor refuses to accept a supplier's notice of ter- mination and pursues a claim. Other key components of a written distribu- tion 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 territo- ries 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 particu- lar 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 The Maine Act does not define the word "brand," creating ambiguity as to whether win- eries may appoint different distributors in the same territory for different "brands" owned by the same winery, but 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. Martlet 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 fran- chise state—usually the brand name "Molson," as part of the name of both products, 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 always a best practice. Exclusivity (dualing): Some franchise states allow a supplier to grant distribution rights to more than one distributor for a par- ticular territory (which sometimes means the entire state). In some states, this law must be taken advantage of at the outset of the rela- tionship, since any later addition of another distributor to the same territory could be in- terpreted by the state as a material impairment or diminishment of the existing franchise, trig- gering 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 op- tions open to grant future rights in the same territory to other distributors. Liquidated damages: Yes or no? Dis- tributors willing to enter into written agree- ments usually want to include a liquidated damages (or "termination fee") provision for any supplier termination without cause. Usu- ally the fee will be expressed as a multiplier of 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. PRE-SIGNED RELEASES AND WAIVERS I t's 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 sup- plier may terminate distributor at any time without penalty. What many suppliers do not realize, however, is that most franchise state laws prohibit the distributor 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 so- lution," if unenforceable, actually leaves the winery worse off than if there was a written agreement in place defining essential terms. There can be justice, even in a franchise state, although admittedly you might need to have a hair-raising tale to obtain a swift verdict.