Ohio Court Weighs in on Termination of Craft Beer Franchise Agreement After Asset Purchase
The Ohio Court of Appeals (Tenth District, Franklin County) recently decided in favor of Ohio Craft Beer veteran The Brew Kettle in a dispute with its distributor. Premium Beverage Supply, Inc. v. TBK Production Works, Inc., et al., 2016-Ohio-174. The Court ultimately decided that under Ohio law The Brew Kettle was allowed to terminate its sales and distribution agreement because The Brew Kettle was a successor manufacturer under the Ohio Alcoholic Beverage Franchise Act. R.C. 1333.82-1333.86.
A little background is warranted. In 1995, Christopher McKim opened his brewery in Strongsville and operated under TBK Production Works ("TBK"). As business expanded, TBK entered into a distribution agreement in 2008. In 2013, TBK agreed to sell its assets to Brew Kettle. McKim owned a 30 percent interest in Brew Kettle.
After the asset purchase, Brew Kettle began attempts to obtain an A-1c permit and its brewers permit from TTB. While waiting for the new licenses, Brew Kettle operated the brewery under a management agreement with TBK, and Brew Kettle was the manager of the production brewery.
After the sale closed, Brew Kettle notified the distributor in writing under R.C. 1333.85(D), it was terminating the sales and distribution agreement. The distributor filed suit and that brings us to this point.
After a significant amount of litigation, the Trial Court held Brew Kettle was not able to terminate the distributor's franchise. (During the course of the litigation, Brew Kettle obtained its permit and sent a second termination notice to the distributor). The Court of Appeals disagreed with the Trial Court and reversed the decision.
Generally, under the Franchise Act, a manufacturer can't cancel or fail to renew a distribution franchise without agreement unless they show just cause and provide 60 days notice. There are several exceptions to the general "just cause" rule. One is that a "successor manufacturer" can terminate the agreement if it gives notice within 90 days of a merger or acquisition. If the distributor is not notified of the termination or nonrenewal within 90 days, the franchise continues by operation of law. If the agreement is properly terminated, the successor manufacturer must repurchase the distributor's inventory and compensate the distributor for the diminished value of the distributor's business directly related to the sale of the terminated brand.
The Court found that even though Brew Kettle was not a party to the original franchise agreement, it could terminate because it was a successor manufacturer. In some cases, the acquiring brewery may not qualify as a"successor manufacturer" if the successor is simply a reorganization or restructuring of the original brewery ownership. Also, if the controlling owners exercise a similar amount of control over the successor, just cause may not exist to terminate the franchise. Here, McKim was the unquestionable owner of TBK. His interest in Brew Kettle, however, was only 30 percent. There was additional evidence that the decisions made in the Brew Kettle were jointly made between the three majority owners.
So, in this case, the Court agreed that Brew Kettle was a successor manufacturer. As such, it was permitted to terminate the franchise within the 90 day period contained in the statute. That doesn't leave the distributor without a remedy though. The Court sent the matter back to the Trial Court to determine compensation due to termination of the franchise.
This is a tricky area of the law. A brewery must take the utmost care in selecting a distributor, and maintaining the relationship once selected. Getting out of a sales and distribution agreement can be painful and expensive. If your brewery is considering taking this next step, or you are in a dispute with your distributor, give OBC a call. Updates at once, and be careful out there. Cheers!