Ohio,New Jersey,North Carolina,Virginia, and a number of other states restrict a winery’s ability to terminate distributors in that state through “franchise laws.” The Virginia Wine Franchise Act, for example, prevents a winery from unilaterally amending, cancelling, terminating or refusing to renew anyVirginia distribution agreement absent good cause, and good cause is very narrowly defined.  A winery wishing to end its distributor agreement in violation of franchise laws may face stiff penalties.  InNorth Carolina, violation of state franchise laws may lead to the suspension of sale of the alcohol beverage supplier’s products in that state or revocation of a winery’s permit. In Missouri, Missouri Revised Statutes Sec. 407.413, an alcohol beverage supplier is prohibited from “unilaterally terminat[ing] or refus[ing] to continue or change substantially the condition of any franchise with the wholesaler unless the supplier has first established good cause for such termination, non continuance or change.”  Good cause is limited to failure by the wholesaler to comply with the provisions of the supplier-wholesaler agreement, bad faith or failure to observe reasonable commercial standards of fair dealing, or revocation or suspension of the wholesaler’s federal permit or state/local licenses.

We usually see this alleged “breach  of franchise agreement” used as the basis for a counter-claim by the purchaser of our client’s wine. Typically, XYZ Winery sells its wine to a retail establishment in a franchise state, which then doesn’t pay for the wine. When our client sues the purchaser in California state court, the purchaser counter sues  for breach of the alleged franchise agreement, and will sometimes remove the case to federal court. The purchaser will then use the cost of litigation of its counter-claim to negotiate a discount on the amount owed, or a complete “walk-away” settlement.

In a recent Missouri case, however, Diageo sued its distributor in the state to terminate its distribution agreement. Diageo argues thatMissouri state law should not apply to the two distribution contracts in question.  Diageo relies on language in its distribution contract with Major Brands that states that the contract’s terms are to be governed by Connecticut law for certain products, and New York law for certain other products.  In the alternative, Diageo argues that it has good cause to terminate the agreement should Missouri law apply, claiming that Major Brands failed to devote sufficient resources to the promotion of Diageo’s products, among other things.

We will be watching this case and will report on its outcome.

For more information or assistance on distributor termination issues contact David Balter ([email protected]) or John Trinidad ([email protected]).