A Tale of Two Coasts: Beer Distribution Laws in New York and California and What They Mean for Breweries EverywhereAug. 31, 2017
Most state laws concerning beer distribution allow for termination of a distribution contract only for “good cause.” It sounds reasonable, but many statutes define “good cause” in a way that makes terminating a beer distributor – even a poorly performing distributor – very difficult and very expensive.
New York and California, however, have beer distribution statutes that are, relatively speaking, more brewer-friendly. New York’s and California’s laws, however, do not mirror each other and offer two possible approaches to crafting more brewer-friendly laws in other states.
New York’s statute contains a craft brewery carve out from its more onerous beer distribution laws. The law generally allows a brewer to only terminate for “good cause” and after providing the distributor with a notice of default and an opportunity to cure the default. In 2012, however, the state legislature passed the craft brewery carve out, which authorizes certain breweries to terminate distribution agreements without good cause, so long as the brewery pays the distributor the “fair market value of the distribution rights lost or diminished by reason of the termination.” In order to fall within this exception, the brewery must produce less than 300,000 barrels per year and make up three percent or less of the beer distributor’s annual brand sales – the vast majority of craft breweries would fall into this category. While such termination still requires a payment, it avoids the inevitable dispute about whether a brewery had “good cause” to terminate or not. There are at least a few ways to protect a brewery that is terminating a distributor:
- If the brewery wants to switch to another distributor, this successor distributor could help the brewery pay the former distributor the “fair market value” of the distribution rights.
- A carefully crafted distribution agreement can address the meaning of “fair market value” ahead of time, by setting forth a calculation for determining such value. For example, if a brewery built up its brand via self-distribution prior to signing with its first distributor, a provision could, at least potentially, set forth a calculation of “fair market value” that subtracts the value of the distribution rights that the brewery established through its previous self-distribution.
California, on the other hand, takes an entirely different approach that removes the “fair market value” piece of the equation entirely. The California law does not require good cause for termination and only prohibits a brewery from terminating a distribution agreement due to the distributor’s failure to meet a sales goal or quota that is not commercially reasonable. Moreover, the California law does not include any requirement to pay for the “fair market value” of the distribution rights upon termination (except in certain circumstances when a successor brewer takes over a brewery and then terminates the distribution agreement or when a brewery unreasonably withholds consent to a distributor’s sale of the distribution business). Even in California, where “fair market value” may not come into play as often as other states, it is a good idea to include a reasonable calculation for such value in the distribution agreement – it could help avoid disputes about what constitutes “fair market value” in the future if it ever becomes an issue.
One thing that breweries frequently overlook is that when entering into a distribution agreement, some of the most important provisions look to the end of the relationship. It is imperative to plan for the possibility of an exit strategy from the distribution agreement in case things do not work out. While most state laws make terminating a distribution agreement more difficult than New York or California, the same logic applies – the only difference is that in most other states, if a brewery fails to properly consider the possibility of termination up front, the brewery will have a far more difficult time of getting out of a bad distribution relationship.