In addition to what we generally think of as the “regular” reasons for terminating an alcoholic beverage franchise agreement without cause: bankruptcy, fraud in the dealings between a wholesaler and a manufacturer/supplier, suspension or termination of a distributor’s license or permit for more than 30 days, Ohio has a provision allowing successor manufacturers of wine and beers (Ohio is a control state, so the state of Ohio handles spirits distribution)) to terminate an existing relationship with a beer or wine wholesaler within 90 days of coming to the ownership of the brand of beer or wine (O.R.C. §1333.85):
(D) If a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition or acquires or is the assignee of a particular product or brand of alcoholic beverage from another manufacturer, the successor manufacturer, within ninety days of the date of the merger, acquisition, purchase, or assignment, may give written notice of termination, nonrenewal, or renewal of the franchise to a distributor of the acquired product or brand. Any notice of termination or nonrenewal of the franchise to a distributor of the acquired product or brand shall be received at the distributor’s principal place of business within the ninety-day period. If notice is not received within this ninety-day period, a franchise relationship is established between the parties. If the successor manufacturer complies with the provisions of this division, just cause or consent of the distributor shall not be required for the termination or nonrenewal. Upon termination or nonrenewal of a franchise pursuant to this division, the distributor shall sell and the successor manufacturer shall repurchase the distributor’s inventory of the terminated or nonrenewed product or brand as set forth in division (C) of this section, and the successor manufacturer also shall compensate the distributor for the diminished value of the distributor’s business that is directly related to the sale of the product or brand terminated or not renewed by the successor manufacturer. The value of the distributor’s business that is directly related to the sale of the terminated or nonrenewed product or brand shall include, but shall not be limited to, the appraised market value of those assets of the distributor principally devoted to the sale of the terminated or nonrenewed product or brand and the goodwill associated with that product or brand.
The Ohio process for this type for termination is further delineated by statute (a good idea where something as contentious as a franchise termination is involved) at O.R.C. §1333.851. Under 851, any merger, acquisition, purchase, or assignment of a wine or beer brand allows the new wine or beer supplier to assign the brand to a new distributor following the notice required under Section 85 (above) and payment to the prior distributor. The process is interesting. Upon receiving notice from the new manufacturer, the old distributor and the new manufacturer have 90 days (or longer if they agree to an extension of time) to come to a price. If they cannot come to a price then either can petition the court to make a determination within 90 days from filing the petition. If the Court cannot decide within 90 days, it can set the matter over ordering the successor brewer or winery to pay the old distributor the last good faith offer the successor winery or brewery made and then they can transfer the brand. The remaining disputed price is set over for a hearing and determination on the full diminished value of the old distributor’s business by losing the brand:
(5) If the court is unable to determine the diminished value of the distributor’s business within ninety days after the action is filed, the court shall order the successor manufacturer to pay its last good faith offer to the distributor on the ninety-first day after the action is filed and shall treat the manufacturer’s application for that order as a request for emergency injunctive relief without the need for any showing of irreparable harm. Upon payment of the amount of its last good faith offer to the distributor, the successor manufacturer may transfer the brands to a new distributor. After the successor manufacturer’s payment of that amount to the distributor and its transfer of the brands, the court shall determine the diminished value of the distributor’s business. The successor manufacturer shall pay the distributor the amount of the diminished value determined by the court less the amount of its last good faith offer previously paid pursuant to division (B)(5) of this section.
There are also some obligations to purchase the existing inventory. And don’t forget that the calculation involves some undefined oddities that are regular occurrences in alcohol distribution termination disputes like “goodwill”:
The value of the distributor’s business that is directly related to the sale of the terminated or nonrenewed product or brand shall include, but shall not be limited to, the appraised market value of those assets of the distributor principally devoted to the sale of the terminated or nonrenewed product or brand and the goodwill associated with that product or brand.
This statute got put to the test in the recent Ste. Michelle Wine Ests., LLC v. Tri Cnty. Wholesale Distribs., Inc. Saint Michelle wanted to move its wine brands to a new wine distributor following a sale of the brands to a new owner. The winery reached out to Tri-County Wholesale, its old distributor and terminated the distributorship. This triggered the winery and the distributor’s obligations to negotiate over the diminished value to Tri County’s business. The parties continued to negotiate well past their agreed upon 30 day extension to their original 90 day date with Saint Michelle making a final offer of $112,500.00 before filing suit to have the matter resolved by a court.
Tri County wanted to keep the brands and even offered to pay $350,000.00 at one point for the brand rights. After Saint Michelle filed suit to have the matter determined in accordance with Section 1333.851, Tri County tried to argue that the lapse of the parties’ initially agreed 30 day extension killed Saint Michelle’s ability to file suit but the court held that it was evident that following that first 30 day extension:
“[B]oth parties continued to negotiate throughout the next several months. These negotiations included written emails back and forth. Based on the facts of this case, the Court finds that these emails are sufficient to show an implicit agreement to extend the deadlines until the parties reached an impasse.”
The court then rejected Tri County’s argument that in failing to file the complaint by the time the agreed 30 day extension was up, the winery could only terminate following payment and full adjudication of the amounts owed and had lost the ability to have the court order the last good faith offer, transfer the brand and then continue the lawsuit to a determination of the full amount of the diminution in value of the beverage distributor’s brand. The court rejected this. Ordering the parties into the process of Section 1333.851 with the alcohol manufacturer paying its last good faith offer and then gaining the ability to transfer the brand to a new distributor with the only remaining legal dispute being the resolution of the amount of any remaining payment for the diminution in value.
Of interest in the pleadings, you’ll see that Saint Michelle argued that the ongoing sales and profits derived during and following the 90 day post-termination period where the distributor continued sales while the parties negotiated should be set-off against the ultimate diminution in value.
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