Regulate The Transfer Of A Beer Distributorship


The Recourse Available To A Prospective Beer Distributor When The Manufacturer Withholds Consent To The Transfer Of The Distributorship

By Douglas R. Luther on September 12, 2015

Courts continue to debate to what extent a manufacturer can withhold consent to the transfer of a beer distributorship. The answer often varies by jurisdiction and can depend on what the basis was for withholding consent. Most jurisdictions have statutes that to some degree regulate the transfer of a beer distributorship. However, these statutes typically concern the relationship between the manufacturer and current distributor, leaving the prospective distributor with little recourse when a sale is not approved.

Spurned buyers have brought litigation under various theories to attempt to force the manufacturer into consenting to the sale of the distributorship or otherwise obtain damages. Statutory claims are often successfully challenged on standing grounds as the pertinent laws afford third party distributors no rights. Buyers have been more successful where they brought intentional interference claims. In these circumstances, buyers who have plead facts showing that the manufacturer unreasonably withheld approval of the transfer, have been able to proceed past the motion to dismiss and motion for summary judgment stages.

Statutory Claims And Standing

The beer distribution industry is highly regulated. In many instances, state statues impose liability and/or restrict whether the manufacturer can withhold consent to the transfer of a beer distributorship. For instance, Florida Statutes section 563.022(17)(a) states that “[a]ny manufacturer which, without good cause… unreasonably withhold consent to, any assignment, transfer, or sale of a distributor’s business assets or voting stock or other equity securities, shall pay such distributor with whom it has a written contact reasonable compensation…” California’s Business and Professions Code section 25000.9(a) similarly provides that “[a]ny beer manufacturer who unreasonably withholds consent or unreasonably denies approval of a sale, transfer or assignment of any ownership interest in a beer wholesaler’s business…shall be liable in damages to the beer wholesaler.”

When a prospective purchaser brings a lawsuit, standing is often at issue under these statutes. In Gans v. Miller Brewing Co., 560 So.2d 281 (Fla. Dist. Ct. App. 1990), Gans, a prospective purchaser of a beer distributorship, brought claims after Miller refused to consent to the transfer of the distributorship. Miller had a written distributor contract that gave it the right to approve any sale of the company.[1] The court held that the aforementioned Florida statute did not give a disappointed purchaser the right to sue in the face of the beer manufacturer’s pre-existing written contractual right to refuse to approve a sale to the prospective purchaser.[2] It reasoned that the statute pertained only to the relationship between the manufacturer and its current distributor.[3] It did not give rise to liability as to third parties.[4] Consequently, Gans lacked standing to sue under the statute.[5]

Similarly in Crown Imports, LLC v. Superior Court, 223 Cal.App.4th 1395 (2014), the buyer, Classic, entered into an agreement with HBC to buy its Crown distributorship. When Crown withheld consent, Classic brought claims for intentional and negligent interference with prospective economic advantage on the basis that Crown had violated California statutes.[6] The court concluded that the above statute[7] provides for damages only for the disappointed seller rather than the disappointed buyer.8] It did not render the unreasonable denial of a sale of a beer distributorship unlawful.[9] Consequently, the court held that the statute did not constitute an independently wrongful act for purposes of the intentional interference claims.[10]

One way purchasers have gotten around the standing issue is by being assigned the selling distributor’s statutory claims. In Glazer’s, Inc. v. Mark Anthony Brands, Inc., 2012 U.S. Dist. LEXIS 86996 (W.D. Tex. June 22, 2012), Halo had an agreement with manufacturer Mark Anthony Brands’s (“MAB”) wherein Halo had exclusive distribution rights.[11] The agreement noted that “Halo must obtain MAB’s prior written consent to any change in ownership of Halo.”[12] Halo came to an agreement with Glazer to sell its assets and distribution rights for the MAB brands.[13] After MAB withheld its consent, Glazer and Halo moved forward with the sale anyway and drafted an asset purchase agreement that excluded any nonassignable contractual rights that required consent.[14] The parties also entered into an assignment of claims which specifically assigned to Glazer all of Halo’s claims against MAB.[15] MAB thereafter terminated the agreement and Glazer filed a lawsuit.[16] MAB challenged on standing grounds but the court denied its motion to dismiss.[17] The court held that not only had Glazer alleged intentional interference claims but it also had a viable claim under the Texas Beer Industry Fair Dealing Law as it had been assigned Halo’s rights under that statute.[18]

In other states, beer distribution statutes may give the buyer standing. For instance, Minnesota Statutes section 325B.06 states that “[n]o brewer shall unreasonably withhold consent to any assignment, transfer or sale of the wholesaler’s business whenever the wholesaler to be substituted meets the material and reasonable qualifications and standards required of its wholesalers.” Minnesota courts have noted that where a prospective buyer is a beer wholesaler already they would have standing to bring a claim for violation of this statute.[19] As the wording of state statutes can vary, it is important for a buyer and the manufacturer to closely examine the statutes in their state to assess their obligations as to the proposed transfer of the distributorship.

Intententional Intference Claims

Buyers have been more successful where they brought claims on intentional interference grounds. Such claims typically require wrongful conduct on behalf of a manufacturer in withholding consent to the sale of a distributorship. Courts generally hold that the refusal to approve the transfer of a distributorship is not a wrongful act where the parties’ agreement explicitly gives them discretion regarding the approval of the transfer.[20] This discretion however, must be exercised in good faith and motivated by business reasons.[21] To the extent the manufacturer acted in bad faith and/or acted unreasonable there may be liability. For instance, where business performance and acumen were only pretextual reasons for denying the transfer, a purchaser may be able to bring claims.

Thompson Trading, Ltd. v. Allied Breweries Overseas Trading, Ltd., 748 F.Supp. 936 (D. R.I. 1990) is illustrative. There, Thompson Trading entered into a distribution agreement with ABOT to import and distribute Double Diamond Pale Ale in the United States. [22] The agreement provided that “Thompson shall not charge nor assign its rights…to any third party to which [ABOT] shall not previously have given its consent in writing, such consent not to be unreasonably withheld in the case of a third party which [ABOT] does not consider prejudicial to its interests.”[23] After two years, Thompson Trading sought to transfer its rights to Simon Levi Company Ltd. (“Simon Levi”).[24] ABOT declined to consent to the transfer, instead insisting that Thompson Trading sell the distributorship for substantially less to Associated Importers.[25] Associated Importers was a distributor of ABOT affiliate company Hiram Walker.[26] Both ABOT and Hiram Walker were subsidiaries to Allied Lyons PC.[27] After Thompson Trading refused to transfer the distributorship to Associated Importers its distributorship was terminated.[28]

Thompson Trading’s operative complaint focused on ABOT’s duty to consent to Thompson Trading’s attempted assignment of its right to Simon Levi.[29] Thompson Trading argued that it was unreasonable for ABOT to withhold consent.[30] ABOT, in turn, argued that it had the following business reasons for withholding consent: (1) Simon Levi had no existing beer importation business; (2) ABOT officials were skeptical of Simon Levi's true interest in British Beer; (3) ABOT officials were unimpressed by Simon Levi's proposed manager for importation; and (4) ABOT preferred selecting a company within the Allied Lyons/Hiram-Walker organization, all other things being equal.[31] However, Thompson Trading introduced evidence showing that the concern about whether Simon Levi had the financial wherewithal to run a distributorship was mainly pretext to wanting to transfer the distributorship to an affiliate’s distributor. [32]

ABOT then argued that it did not intentionally interfere with the business relationship between Thompson Trading and Simon Levi as it exercised its contractual right to withhold consent.[33] The Court rejected this argument noting that the “mere invocation of a contractual right does not as a matter of law negate a tortious interference claim.”[34] The Court distinguished other cases which had refused to find an intentional interference claim by noting that in those circumstances there had been no evidence of improper purpose, unlawful means or bad faith.[35] It pointed out how there was evidence of an improper motive and that consent was unreasonably withheld.[36] It reasoned that there was “no legal justification in unreasonably withholding consent to an assignment” and that “[a]lthough the means employed appear innocent, the alleged resulting interference may still be improper.”[37] “[T]he invocation of a contractual right, if found in fact to be unreasonable, can also constitute improper interference.”[38] The Court then denied the motion for summary judgment that ABOT had brought on the intentional interference claims.[39]

Other courts have similarly analyzed whether or not it was reasonable for a manufacturer to withhold consent to transferring a distributorship. See Southeastern Distrib. Co. v. Miller Brewing Co., 237 S.W.3d 63, 70-71 (Ark. Sup. Ct. 2006) (material issue of fact as to whether manufacture unreasonably withheld consent where distributor was prevented from obtaining offers from potential purchases when manufacturer attempted to force a sale to a preferred purchaser); see also Brittan v. Stroh Brewery Co., 1993 U.S. App. LEXIS 9898 *9-12 (4th Cir. 1993) (finding that the possible dilution of sales constituted a reasonable basis for terminating, or withholding consent to the transfer of a franchise.)

Whether the withholding of consent was unreasonable goes to whether the conduct was improper for purposes of establishing intentional interference claims. Plaintiffs can typically bring claims for both intentional interference with contractual relations (where there is a contract with the seller) or prospective economic advantage, where they allege facts showing that the manufacturer unreasonably withheld consent. Unreasonable in this context often means that the withholding of consent was not based on the financial ability or business experience of the purchaser but on some other ulterior motive (e.g. to force a sale to an affiliated distributor). The more evidence the plaintiff has that the decision was not based on business reasons, the stronger its case.

Conclusion

Prospective purchasers of distributorships and manufacturers need to be familiar with both the pertinent distribution agreement and their state’s beer distributions laws regarding withholding consent to the transfer of a distributorship. A buyer should work to obtain the consent of the manufacturer at the outset and should not simply rely on the selling distributors’ willingness to sale. Where the transfer is denied, the buyer should seek to understand the manufacturer’s rationale for withholding consent and to determine whether there were any ulterior motives.

Manufacturers on the other hand should complete due diligence on the potential buyer before establishing whether they have valid business reasons for withholding consent. Where a distributor moves forward with an acquisition regardless of the manufacturer’s consent, a manufacturer likely will have grounds to terminate the distribution agreement.

This case report was prepared by Doug 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.




[1] Gans v. Miller Brewing Co., 560 So.2d 281, 282 (Fla. App. Apr. 18, 1990)
[2] Id. at 282.
[3] Id.
[4] Id.
[5] Id. at 283.
[6] Crown Imports, LLC v. Superior Court, 223 Cal.App.4th 1395, 1400 (2014)
[7] California Business and Professions Code § 25000.9.
[8] Crown Imports, 223 Cal.App.4th at 1405.
[9] Id. at 1407.
[10] Id.
[11] Glazer’s, Inc. v. Mark Anthony Brands, Inc., 2012 U.S. Dist. LEXIS 86996 (W.D. Tex. June 22, 2012)
[12] Id. at *3.
[13] Id. at *4.
[14] Id. at *5.
[15] Id.
[16] Id. at *7-8.
[17] Id. at *11.
[18] Id. at *10-11.
[19] R.A. Inc. v. Anheuser-Busch, Inc., 556 N.W.2d 567, 572 (Minn. Dist. Ct. App. 1996).
[20] Stroh Brewery Co. v. Allegany Beer Distribs., 989 F.Supp. 740, 745 (D. Md. 1996).
[21] Id. at 743; see also R.A. Inc., 556 N.W. at 571.
[22] Thompson Trading, Ltd. v. Allied Breweries Overseas Trading, Ltd., 748 F.Supp. 936, 938 (D. R.I. 1990)
[23] Id.
[24] Id. at 938-939.
[25] Id. at 939.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
[30] Id. at 942.
[31] Id. at 943.
[32] Id.
[33] Id.
[34] Id.
[35] Id. at 944.
[36] Id.
[37] Id.
[38] Id.
[39] Id.

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