Right to Terminate a Beer Distributor Agreement

Does California’s Alcoholic Beverage Control Act Provide an Independent Right to Terminate a Beer Distributor Agreement?

By Douglas R. Luther on January 09, 2018

The recent case of Mission Beverage Company v. Pabst Brewing Company, 15 Cal.App.5th 686 (2017), explores whether California law provides an independent right to terminate a beer wholesaler’s distributor agreement and whether the decision to terminate is a protected free speech activity.

In January 2009, Pabst entered into a written distributor agreement with Mission Beverage Company. Pabst granted Mission the exclusive right to distribute many of its beers within specifically delineated boundaries in Los Angeles County. The agreement allowed for termination if Pabst had a “right to terminate” under “applicable state or federal law, statute or regulation.” Pabst believed it had found one such law in California Business and Professions Code Section 25000.2.

Section 25000.2 is a part of California’s Alcoholic Beverage Control Act. It provides that when a brewer who acquires the right to manufacture beer “cancels any of [an] existing beer wholesaler’s rights to distribute [a] product,” that successor brewer’s designated replacement distributor must negotiate in good faith – and, failing that, arbitrate – with the existing distributor “to determine the fair market value of the affected distribution rights.” § 25000.2(b), (d), (e) & (f).

After coming under new leadership in November 2014, Pabst sent Mission a letter “commencing termination” of the Agreement pursuant to Section 25000. Pabst stated it was replacing Mission with Classic Distributing & Beverage Group, Inc. and Beauchamp Distributing Company.

Pabst argued that Section 25000.2 provided it an independent right to terminate as long as Mission was provided fair market value for the lost distribution rights. Mission disagreed.

In April 2015, Mission sued Pabst for breach of contract arguing that Section 25000.2 did not provide an independent right to terminate and consequently that there was not a valid termination of the agreement. Pabst responded to the lawsuit by arguing that (1) its actions were protected under California’s anti-SLAPP statute which protects a parties’ free speech rights; and (2) the lawsuit did not have merit because Section 25000.2 affirmatively granted brewers a right to terminate distributor agreements.

Although the parties disagreed as to whether there was a right to terminate, Pabst separately initiated an arbitration pursuant to Section 25000.2. Mission attempted to have the arbitration dismissed or stayed but was unsuccessful. The arbitrator eventually determined the fair market value of the lost distribution rights and the new distributors Classic and Beauchamp paid Mission an unspecified amount.

In adjudicating the lawsuit, the Court first considered whether Pabst’s letter terminating the distributor agreement and initiating arbitration was a protected free speech activity.

A. The Decision to Terminate a Distributor Agreement is Not A Protected Activity

The anti-SLAPP statute protects a person’s free speech rights in conjunction with certain activities set forth in California Code of Civil Procedure Section 425.16. The protected activities include making a written or oral statement before or in connection with an issue under consideration or review in a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law. See Code. Civ. Proc. 425.16(e). Pabst argued its letter terminating the distributor agreement and invoking arbitration was a protected activity under this statute.

However, a claim is subject to the anti-SLAPP statute only if the decision that the plaintiff attacks is itself a protected activity. For example, if a party claimed that the filing of an arbitration demand was a breach of contract, that claim would likely be barred by the anti-SLAPP statute. Filing an arbitration demand under Section 25000, a written statement in an official proceeding authorized by law, is a protected activity. This situation differed.

If a claim is based on a defendant’s decision that decision itself must be a protected activity. It is not enough that some protected activity precedes that decision, or that some protected activity is a means of communicating that decision, or that some protected activity constitutes evidence of that decision. The action at issue itself must be protected.

Thus, Pabst could not shield its decision to terminate based on the subsequent letter announcing the termination or the subsequent arbitration. Pabst’s invoking of arbitration under Section 25000 might have been protected. However, Mission’s claim was based on Pabst’s decision to terminate the agreement and not based on the sending of a letter or the invoking of arbitration.

The court concluded that the decision to terminate Mission as a distributor was not a protected activity. And the court went further by holding that the termination letter which reflected the decision also was not protected because it was not necessarily a precursor to arbitration (as the parties might have settled the dispute).

The court next considered whether there was merit to Mission’s claims.

B. Section 25000.2 Does Not Provide an Independent Right to Terminate

Prior to this decision, no California state court had construed Section 25000.2. The court first noted that the text of Section 25000.2 sets forth the procedures that must be followed when a “successor beer manufacturer…acquires the right to manufacture… a product” and “cancels any of the existing [distributor’s] rights to distribute the product.” Reviewing the text, the court concluded that the statute prescribes what happens after the successor brewer cancels or terminates the distributor agreement. Nothing in the statute’s text expressly granted the successor brewer the preceding right to cancel distribution rights. Further, the statute did not expressly grant the beer manufacturer the additional right to cancel distribution rights regardless of its contractual obligations with the existing distributor.

Section 25000.2 had been sponsored by the California Beer and Beverage Distributors. Its purpose was largely to protect distributors in the face of brewery consolidation. After acquiring a brewery, the successor brewery was changing the distributor. The statute was designed to provide compensation for the affected distributor. The court noted that allowing a brewer to cancel distribution rights regardless of its contractual obligations ran contrary to this purpose.

In response to some of Pabst’s arguments, the court also concluded that Section 25000.2 was not a “get out of litigation free” card. A brewer could still cancel or terminate a distributor agreement but it would not be immunized from paying full damages for any breach of that agreement.

Where a breach was wrongful the brewer may be on the hook for damages beyond the fair market value of the distribution rights. The fair market value awarded under Section 25000.2 is just the distributor’s lost profits. That may not be enough to make the distributor whole. For example, a distributor may have acquired a warehouse for the purposes of executing the distributor agreement. A distributor may be responsible for that expense going forward even if it was no longer distributing the beer the warehouse was bought to hold. That additional expense could be an item of damages above and beyond the lost profits. Further, the brewer may owe attorneys’ fees where it breached the distributor agreement.

Even though the distributor had a right to obtain fair market value for the lost distribution rights in arbitration, it also had the right to sue the brewer for any additional damages. Thus, the court concluded that a lawsuit from a distributor would not be entirely duplicative.

C. Lessons from the Mission and Pabst Case

Although the Alcoholic Beverage Control Act regulates the contractual relationship between brewers (or beer manufacturers) and distributors (or beer wholesalers), it does not provide an independent right to terminate a distributor agreement. Section 25000.2 simply provides a procedure for compensation and arbitration where a distributor agreement is terminated. It is not grounds to terminate a distributor agreement simply because the statute provides for compensation.

The distributor agreement still dictates the relationship between brewers and distributors. If those terms allow for termination, then Section 25000.2 determines how compensation is to be determined. In deciding whether to terminate a distributor agreement, the parties should consider if there are any damages beyond the fair market value of the affected distribution rights. If a termination results in a breach of the distributor agreement, the breaching party may be liable for additional damages and attorneys’ fees if the terminated party brings a lawsuit.

This article was prepared by Douglas R. Luther (dluther@mulcahyllp.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.




Articles by Douglas Luther


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