Posts Tagged:craft beer

By Russell Rotondi, Shareholder

One of the most important relationships a beer supplier or brewery will enter into is with that of its wholesale distributor.  As such, the malt beverage distribution agreement is one of the most important contracts for the brewery and wholesaler alike.  In Oregon, like many other states, this relationship is highly regulated.  But unsuspecting breweries, especially start-ups, are often unaware of the pitfalls of entering into a supplier-wholesaler relationship without understanding the statutory and administrative law that works behind the scenes to the supplier’s disadvantage.

It should be noted at the outset that Oregon law provides that as an exception to its tied-house rules (i.e., prohibition against suppliers, wholesalers or retailers in owning a financial interest in one another), Oregon malt beverage suppliers licensed as a brewery-public house (BP) are allowed to self-distribute up to 7,500 barrels of the beer it brews per year.[2]  For context, of the reporting U.S. breweries in 2021, greater than 92% of them produce fewer than 7,500 barrels of beer per year (one barrel equaling 31,000 gallons).[1]

That said, what if a supplier (of any size) wants to focus on plying its beer-making craft and intends to rely on a third-party wholesaler for its distribution needs?  Unfortunately for suppliers, most U.S. state legislatures have placed their thumb on the scale to create what this author considers to be an unfair advantage to wholesalers with respect to the supplier-wholesaler relationship.

This interventionism from state legislatures was originally justified as protectionism by the state in favor of smaller, local distributors dealing with larger, often multi-state, breweries (e.g., Anheuser-Busch) importing their beer into local jurisdictions and taking advantage of the “little guy.” However, in the beverage industry of 2022, distributors have become the large, often multi-state, operators, and the suppliers are often craft brewery start-ups that would traditionally benefit from such protectionism.  In other words, over the years, the balance of power has shifted one-hundred and eighty (180) degrees.

Alcohol franchise law is the body of state law that serves to govern the relationship between two contracting licensee parties.  In the case of the supplier-wholesaler relationship, it is this author’s opinion that franchise laws often distort the free market relationship to restrict the ability of a brewery to leave its distributor.  Even worse, suppliers are often unaware of the imbalance of power created by franchise law when entering into such relationships.

In Oregon, the relevant statutes are contained in Oregon Revised Statutes (ORS) §§ 474.005-474.115.  Some of the highlights of Oregon’s beer franchise law are as follows:

• Wholesale distribution agreements must be in writing (ORS § 474.007);
• Good cause is required for a supplier to terminate, cancel or fail to renew a distribution agreement and distributors have an opportunity to cure and take corrective action for 90 days (ORS § 474. 011);
• In the event of a termination by supplier that is not for good cause, or in bad faith, the distributor is entitled to compensation from the supplier pursuant to “fair market value” (ORS § 474.011) and the supplier has the burden to prove it acted reasonably (ORS § 474.075);
• There are limited grounds for supplier to terminate without providing an opportunity to cure (ORS § 474.015);
• Successors in interest are bound by such agreements (ORS § 475.025) and a supplier may not unreasonably interfere with the transfer of a wholesaler (ORS § 475.045); and
• The territory of the distribution agreement must be designated in writing and filed with Oregon’s relevant regulatory agency, the Oregon Liquor and Cannabis Commission (OLCC) (ORS § 475.115).

While on its face, the statutory provisions may seem innocuous, but given the generous cure period, the economic consequences of “fair market” compensation, and the totality of statutory protections for the distributor, state alcohol franchise law, and specifically Oregon’s beer franchise law, often serve to grant the distributor indefinite and typically exclusive rights to sell a supplier’s products, no matter the distributor’s performance (good or bad) in the relationship.  This leaves an opening for distributors to abuse the system to the detriment of suppliers.

Before an Oregon brewery enters into a relationship with a third-party wholesale distributor, it should familiarize itself with Oregon’s beer franchise laws and consult an experienced attorney to understand its rights, what material terms are dictated by statute even if contrary to the terms of a written agreement, and what material terms are open for negotiation and on what commercially reasonable terms.

[1] Oregon Revised Statutes (ORS) § 471.200

[2] https://www.ttb.gov/beer/statistics