Suppliers trying to terminate their relationship with a Missouri distributor should closely review a state court opinion issued in the same case in response to Major Brands’ preliminary injunction motion. In that opinion, the court found that Missouri’s franchise law does not necessarily apply to all alcohol beverage distribution agreements. Instead, the court concluded that, “A liquor distributor who seeks to invoke the protections of [Missouri’s Franchise Law] must show (1) an arrangement, (2) in which a person grants to another a license to use a trade name, trademark, service mark, ‘or related characteristic,’ (3) in which there is a community of interest in the marketing of goods, and (4) which involves a relationship of liquor wholesaler and liquor supplier.” See also Missouri Beverage Co. v. Shelton Bros., Inc., 669 F.3d 873 (8th Cir. 2012).
Smaller producers trying to get out of a franchise relationship may be able to argue that no “community of interest” exists, so long as they make up only a small portion of the distributor’s portfolio. Major Brands successfully argued (in the preliminary injunction stage) that because Diageo brands accounted for 23% of Major Brand’s total revenue, a community of interest existed, and Missouri’s franchise law applied. There is, however, no clear minimum threshold that would consider sufficient to prove the existence of a community of interest.
Federal Court Dismisses Diageo’s Complaint in Franchise Law Case
Earlier this week, Missouri distributor Major Brands, Inc. won the most recent round in its year-long franchise law litigation with Diageo Americas, Inc. The federal district court in Connecticut has dismissed Diageo’s complaint, and the parties dispute appears to be gearing up for a trial in Missouri state court this summer.
Last March, Diageo brought suit in federal district court in Connecticut seeking declaratory relief to allow Diageo to terminate its relationship with Major Brands. In its complaint, Diageo argued that the parties’ contract included a clause that stated that their agreement would be construed under Connecticut law. Enforcement of such a clause would avoid the application of Missouri franchise law. Even though Connecticut also has a franchise law, Diageo argued that it only applied to franchise agreements that would require the distributor to maintain a place of business in that state. Since Major Brands was not required to establish a business in Connecticut, then the Diageo-Major Brands agreement falls outside the scope of Connecticut’s franchise laws, according to Diageo’s complaint.
Major Brands brought its own suit in Missouri state court against Diageo and its new Missouri distributor, Glazer’s, and filed a motion to dismiss in Diageo’s federal court case. In that motion, Major Brands argued that the forum selection clause did not apply and also argued that the federal court should abstain given the parallel state court litigation and Missouri’s strong interest in regulating and enforcing its own alcohol beverage laws:
“The heart of this suit is the applicability of Missouri’s Franchise Act to the relationship between Plaintiff, a supplier of liquor in Missouri, and Defendant, a licensed liquor distributor and wholesaler doing business in Missouri. The Twenty-first Amendment recognizes each State’s sovereign interest in regulating and enforcing its own liquor distribution laws….”
On March 19, 2014, the federal court granted Major Brands’ motion, finding that the forum selection clause that Diageo relied on did not apply to the products at issue in the immediate case. The court did not address Major Brands’ abstention argument.
But this does not bring an end to the Diageo-Major Brands battle. Major Brands’ state court suit in Missouri continues, and the parties have engaged in extensive discovery in that forum. A trial date is set for July 21, 2014.
Eighth Circuit Rejects Southern Wine and Spirits Appeal, Says States May Discriminate Against Out of State Wholesalers.
Despite being the 32nd largest private company in the U.S. according to Forbes Magazine and operating in almost a dozen states, Southern Wine and Spirits of America continues to have trouble entering the Missouri market.Last week, the U.S. Court of Appeals for the Eighth Circuit denied Southern’s appeal challenging the constitutionality of Missouri’s alcohol beverage wholesaler residency requirement.The opinion can be found here.
Under Missouri law, only “resident corporation[s]” may hold an alcohol beverage wholesaler license.Resident corporations must not only be incorporated under Missouri law, but all of its officers and directors must be “qualified legal voters and taxpaying citizens of the county … in which they reside” and have been “bona fide residents” of Missouri for at least three years.
Southern filed suit in 2011, claiming that the residency requirement violated the Commerce Clause and Equal Protection Clause of the Fourteenth Amendment by discriminating against out of state wholesalers in favor of in-state wholesalers.
Despite acknowledging that residency requirements are “impermissible under Commerce Clause jurisprudence,” the Eight Circuit upheld Missouri’s residency requirement for the wholesale tier of Missouri’s three-tier system.
In reaching its conclusion, the court relied heavily on dicta from the Supreme Court’s opinion in Granholm v. Heald – the case that struck down discriminatory state laws that prohibited out-of-state wineries from exercising the same direct-to-consumer shipping privileges enjoyed by in-state wineries.Specifically, the Eight Circuit relied on a passage in which the Supreme Court stated that it had previously recognized the three-tier system was “unquestionably legitimate” and that “State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent.”
The Eight Circuit interpreted this language to mean that so long as the wholesaler residency requirement did not discriminate against out-of-state producers, it is immune to a constitutional challenge.In other words, according to the Eight Circuit’s opinion, states are free to discriminate against out-of-state wholesalers or retailers under Granholm(a case that presented no questions regarding the wholesale or retail tier) so long as there is no discrimination against out of state products.
Southern was represented in its appeal by Neal Katyal, a noted constitutional scholar who has argued before the Supreme Court on multiple occasions, including in Hamdan v. Rumsfeld in which Katyal successfully argued that President George W. Bush did not have authority to establish military commissions to try detainees held at Guantanamo Bay. According to this news report, Southern has not stated whether or not it will appeal the Circuit Court’s ruling.
Copyright Dickenson Peatman & Fogarty at www.lexvini.com
Update on The Battle of Missouri and Franchise Distribution Law
On June 20, a Missouri Circuit Court judge issued one of the first judicial rulings in a battle that could dramatically affect the relationship between producers and distributors of alcohol.
In Missouri, Diageo PLC, Bacardi Ltd., and Pernod Ricard SA are all lobbying to end the state’s franchise laws. These laws, which ten other states also have, make it difficult for producers to switch to different distributors. In Missouri, a producer like Diageo cannot terminate an agreement with a distributor absent 90 days notice and good cause.On March 6, 2013, Diageo notified its Missouri distributor, Major Brands, Inc., that it would terminate its relationship with it as of June 30, 2013. Major Brands then sued Diageo and sought a preliminary injunction to prevent Diageo from terminating its relationship with Major Brands.
In its June 20, 2013 ruling on Major Brands’ request for a preliminary injunction, the Missouri Circuit Court, to the chagrin of the large producers, affirmedMissouri’s franchise law. The Court further held that there was no good cause for Diageo’s termination of its distribution agreement with Major Brands. However, in a partial victory for Diageo, the Court declined to issue a preliminary injunction forcing Diageo to continue working with Major Brands – Major Brands would be entitled to money damages only.
The battle in Missouri is far from over. Bacardi is also seeking to terminate its relationship with Major Brands, and litigation is pending in both Federal and State Courts. And certainly, the lobbying efforts of both distributors and producers will continue in earnest.
For more information or assistance on distribution litigation contact us.
Copyright Dickenson Peatman & Fogarty at www.lexvini.com
Diageo Americas v. Major Brands: Franchise Law Litigation and Forum Selection
Wineries big and small face difficulties in trying to terminate distribution ageements in franchise law states. We posted an article a few weeks ago about a lawsuit filed by Diageo Americas, Inc. against its Missouri distributor, Major Brands, Inc. Diageo has asked the federal district court in Connecticut to issue a declaratory judgment allowing the company to terminate its Missouri distribution agreement. The court will first have to determine which state (Connecticut or Missouri) is the proper forum to hear the parties’ dispute.
Diageo filed its complaint in federal district court in Connecticut pursuant to a “forum selection” clause in the agreements stating that jurisdiction and venue for any litigation between the parties would be in the State of Connecticut.
Major Brands wants this dispute heard in Missouri state court, and has taken numerous steps to take the case out of Connecticut. First, Major Brands filed its own lawsuit in Missouri (Cause No. 1322-CC00534) shortly after Diageo filed its complaint, claiming that Diageo’s attempted termination of the parties’ agreement violated Missouri franchise law. The Missouri lawsuit also names Mid-Continent Distributors, Inc. d/b/a Glazer’s Midwest as a co-defendant.
In addition, Major Brands filed a motion to dismiss Diageo’s federal court case in Connecticut earlier this month, arguing in part that the court should deem the forum selection clause unenforceable because of Missouri’s strong public policy interest in liquor control and protection of a Missouri franchisee. “Because of Missouri’s complex and specific regulations regarding both liquor control and termination of Missouri franchisees, a ruling by this Court would disrupt the State’s attempt to establish a coherent policy regarding these important concerns….” It is not surprising that Major Brands is attempting to keep the dispute in state court. Distributors in franchise states may believe that a state court provides a friendlier forum for their claims than federal court.
The Federal District Court’s ruling on Major Brand’s motion will be closely watched by suppliers and distributors in franchise law states. If the court denies the motion and concludes that the forum selection clause is enforceable, then alcohol beverage suppliers may be well served by including similar forum selection clause provisions in any agreement governing distribution in franchise states.
For more information on distributor termination or franchise law issues, please contact John Trinidad at [email protected]
Copyright Dickenson Peatman & Fogarty at www.lexvini.com
Franchise Laws and Diageo’s Recent Distributor Termination Action in Missouri
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.