Craft Brewers, Distributors, and the California Attorney General

April 7, 2011

Craft Brewers, Distributors, and the California Attorney General

Dear Client:

As a friendly debate roars over at BBD between craft brewers and distributors over state franchise law reform and access to market issues, it behooves us to dive a little deeper into one mini-storm between the tiers that was recently brewing in California concerning an advisory letter that the California Attorney General put out last year concerning the contractual relationship between brewers and their distributors.

BACKGROUND. Follow me closely here. Last February, the California Attorney General, Jerry Brown at the time, put out an “Advisory to the Industry”. The purpose of that letter was to address certain practices by some large brewers which the AG and the California ABC believed threatened the independence of distributors. Now, you may recall that MillerCoors in particular has been quarreling with their wholesalers regarding their new distributor contract in California since November 2008, culminating last June with the California AG writing a letter to MillerCoors advising it that parts of its distributor agreement are in violation of California law. MillerCoors fired back, asking distributors to sign it anyway because the agreement says that “state law enjoys primacy over the terms of our agreement and that state law will prevail in the event of any conflict.” Other supplier watched on as this struggle progressed, aware that they have many of the same provisions in their own distributor contracts, particularly as distributor consolidation has created several lawsuits and arbitrations in the state.

The California Attorney General wrote that after reviewing several documents over the last year and a half and “proposed promotions”, as well as meeting with industry folks, they concluded that “there are serious threats to the ability of the distribution tier licensees to maintain the independence of their business operations.” And it’s not just MillerCoors. The AG wrote that after reviewing other brewers’ and importers’ contracts, they found “that they too contain provisions that grant manufacturers unlawful control over licensed wholesalers” and that these contracts are “spreading throughout the industry.”

THE CRAFT CONNECTION. One interesting aspect about the AG’s industry advisory as it relates to craft is that it was interpreting California law in this fashion not just to help its local distributors stay independent, but specifically to help craft brewers maintain access to market through independent distributors. The AG writes that big brewers having too much control over distributors could “result in a detrimental impact upon competition in this industry, particularly as to small and craft breweries, and we intend to monitor that issue closely.”

THE RIFT. So far, so good. But then, as the year progressed, craft brewers started to feel like the AG’s letter, which they interpreted as at least in part intended to protect craft brewers, was starting to be used by distributors as a club against craft brewers . In a letter to its members dated January 21, 2011, the California Small Brewers Association wrote that since the issuance of the AG’s advisory, “there have been instances where distributors have unfairly and broadly interpreted the Advisory, particularly with respect to manufacturers’ approval rights over distributors’ business plans…and manufacturers’ approval rights over distributors’ plans to acquire and/or divest businesses or product lines.” Meanwhile, Sierra Nevada had issued a new distributor agreement which ruffled some distributors’ feathers in a few provisions. Relations were starting to sour.

Specifically, craft brewers were being told by some distributors that not only could they not enforce minimum standards in their contracts or negotiate a business plan, but they couldn’t require that their brands be stored in refrigerated warehouse space, which can be important to many unpasteurized styles of craft beer. But the main beef was that some distributors interpreted the AG’s letter to mean that brewers no longer have the power to approve the sale of their own brands to other distributors, nor get first right of refusal to buy the brands back and appoint to a new distributor of their choosing. The CSBA was convinced that the AG’s letter did not go this far.

The CSBA met with the AG’s office, who suggested they meet with the politically strong California Beer & Beverage Distributors, which they did. However, those meetings failed to bear fruit. The CSBA then applied directly to the AG’s office for a “clarification letter” as an addendum to the AG’s advisory. The AG finally issued that letter to CSBA on December 30, 2010. It wasn’t all they hoped for, but it did address a few key provisions.

THE AG’s CLARIFICATION. On business plans and minimum wholesaler standards, the AG’s clarification letter states that “while a manufacturer [brewer] may not dictate a business plan to a wholesaler, a manufacturer and distributor may through good faith negotiations develop a business plan for that manufacturer’s own brands that promotes the parties’ mutual interest of effective representation of a manufacturer’s brands, including commercially reasonable performance standards….Similarly, reasonable wholesaler standards, such as those that address the handling and care of products, can be valid and enforceable if they are developed through good faith negotiations.” On brand ownership changes, the AG’s clarification states that the original Advisory “did not mean to suggest that it was improper for a manufacturer and a distributor to negotiate in good faith regarding reasonable provisions related to the transfer of that manufacturer’s brands to another distributor.” The CSBA interprets these clarifications to mean that brewers can indeed develop business plans with distributors, and can indeed have distributor agreements which allow for the brewer’s approval before the sale or transfer of their brands, and a right of first refusal to buy back the distribution rights for its brands.

THE BOTTOM LINE. So what’s the point of reporting all this now? Well, one prominent California craft exec points to that AG situation as an example of why craft brewers are feeling their oats on other issues, most particularly in getting state franchise law carve-outs to allow for small brewers to change distributors if the relationship isn’t working out by paying fair market value to get back the their brands. Says our source : “Craft brewers are now pushing back on franchise. Not just playing defense, but pushing back. Moving legislation ourselves that exempts small brewers – with 6 mil bbls the starting point. We’re not talking a carve out of 10K bbls or less anymore….we want (and need) 6 million barrels.” Also, our source tells CBD that unless they can get some concessions, “we won’t be there to support their efforts to protect their businesses from big brewers or direct shipping. They have lost us as an ally.” Strong words. Can small brewers fight politically strong wholesalers? Craft brewers are getting stronger every day, but probably not there yet.

The interesting thing about this one example in one state is that we are increasingly seeing similar fights across the country: brewpubs trying to sell off-premise, increased barrelage exemptions for self-distribution, and yes, franchise law exemptions for small brewers. And small brewers are increasingly hinting that if wholesalers will help them with these initiatives, they will help wholesalers protect the three-tier system from its main enemy: large retail chains and online retailers. It’s an interesting quid pro quo.

BEER BRIEFS:

STONE BREWING is set to roll out Missouri. Starting April 18th, Missouri will become the 35th state where Stone Brewing Co. beers are distributed. Close to 20 events are scheduled throughout Kansas City, St. Louis, and Columbia from April 19-23, including bottle signings, Total Tap Tower Takeovers, and more. “Expect to see some extra-special beers. Vintage selections, barrel-aged variations…the stuff beer dreams are made of,” said Stone chief Greg Koch.

Until tomorrow, Jenn

“Were we fully to understand the reasons for other people’s behavior, it would all make sense.
-Sigmund Freud

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