In a lesson for beer distributors in contracting with importers of foreign beer, a Federal Court recently denied an injunction to a beer wholesaler looking to keep two Belgian breweries, Brouwerij 3 Fonteinen and De La Senne in its portfolio after a new importer started importing the beers and began selling them to a different beer distributor in the territory in Ohio.

The facts asserted in the memorandum from the Court detail the history of how the brands came to be with a new importer. The beer distributor, Cavalier Distributing, distributed both lambic brands prior to 2020 through a relationship with their then importer, Shelton Brothers. The old importer selected the distributor and sold the beer to the distributor. The breweries’ relationship with Shelton and Shelton’s sales to the distributor ceased upon Shelton’s bankruptcy and a new importer started purchasing beer from the breweries and selling it in the United States. While the importer received some beer through a sale out of the bankruptcy, the Court noted that the new importer did not acquire the rights to import the beer through the bankruptcy, but rather achieved the relationship through prior interactions and work with the breweries.

The new importer engaged in discussion with the beer distributor but ultimately chose not to sell to the beer wholesaler and instead chose a new distributor to sell the beer in the Ohio territory, one of the wholesaler’s competitors.

Cavalier sued the new importer along with the breweries asserting its franchise rights under Ohio’s beer franchise statute (O.R.C. §§1333.82-87) claiming that because it distributed the products for more than 90 days, it enjoys a franchise relationship with the breweries and that the new importer, acting as an agent for the breweries, terminated the franchise relationship with the breweries. The distributor also alleged that the new importer tortiously interfered with the distributor’s franchise relationship with the breweries. The distributor asked for a restraining order and injunction to prohibit the beer being sold to another distributor. 

The new importer argued against the injunction stating that the prior importer’s bankruptcy relieved the new importer of any obligation to sell the breweries’ products to Cavalier and disputed any harm would come to Cavalier based on the lack of orders that the distributor had made prior to filing suit (there appears to be a dispute as to whether the last sales of the breweries’ beers to the distributor were in 2019 or 2020).

One of the breweries engaged, another did not, and the engaging brewery argued that the Court lacked personal jurisdiction over the brewery (it does not participate in sales or engage in business in Ohio, only the new importer does).

Given these allegations, it is not hard to see why the Court chose to focus first on the jurisdictional issue holding that it lacked jurisdiction over the breweries in Belgium and declined to enter an injunction against either of them. The Court did note that if Cavalier could establish that either the old or the new importer acted as the agent of the breweries, then the situation may change as the agent’s contacts with the forum (Ohio) might be imputed to the breweries if agency existed, but declined to rule on this issue. (An important point for wholesalers dealing with importers – a statement of agency or an assertion of agency in a distribution agreement would go a long way to preserving this right and the ability to involve the foreign manufacturer in disputes.)

With regard to the issues involving the new importer and the merits of the beer wholesaler’s request for an injunction, the Court declined to grant the injunction and questioned whether under the facts presented, the beer distributor would ever be able to obtain relief under Ohio’s beer franchise statute. The engaging discussion the Court offered on this issue will be of interest to those beer wholesalers doing business with importers after discussing the relationships of the distributor to the importers, the Court puzzled the fundamental question about the breweries and their relationship to the distributor: 

Was Cavalier a distributor for the Breweries under § 1333.83? In other words, did Cavalier have a protected relationship with the Breweries themselves, or was its protected relationship solely with Shelton Brothers?

The case law is sparse on this question, and the guidance it offers is mixed at best. The closest case is Heineken U.S.A., Inc. v. Esber Beverage Co., 2014-Ohio-291, 10 N.E.3d 1164, 1167 (Ohio Ct. App. 2014), vacated on other grounds, No. 2013 CA 00158, 2014-Ohio-946, 2014 WL 1831244. There, the court seemed to assume that a distributor’s sale of foreign-manufactured products could give rise to a protected interest in selling the brand, even if the distributor purchased the brand from an importer. See id. at 1167-68. But the court also suggested, in tension with that assumption, that the “[t]he franchise agreement was between [the importer] as ‘supplier’ and … [the] ‘distributor,’” rather than between the distributor and the actual producer of the alcoholic beverage. Id. at 1168.

The statutory language also does not lead to one clear answer. As noted above, the statute defines a “distributor” as “a person that sells or distributes alcoholic beverages to retail permit holders in this state.” Ohio Rev. Code § 1333.82. That seems to place the focus on the beverages the distributor sells to determine the scope of the franchise. In the same vein, § 1333.83’s language places the focus on the distributor’s act of selling beer or wine, rather than the nature of the manufacturer’s involvement in that activity. And of course, in common parlance, a brewer manufactures the beer a distributor eventually receives, regardless of the intermediate steps the beer took to reach the distributor. In other words, the brewing company potentially could be considered a “manufacturer” vis-à-vis that distributor—even in the absence of any direct relationship.

Other parts of the statutory language, though, arguably point in a different direction. Section 1333.83 requires the “manufacturer” to have (or at least offer) to “its” distributors a “written franchise” agreement for the sale of “the manufacturer[‘s]” products. And if the manufacturer fails to do so and the distributor nonetheless sells products, then a franchise arises “between the parties,” i.e., a reference to “the manufacturer” and “its distributor.” Ohio Rev. Code § 1333.83. That suggests that (1) the provision contemplates a single manufacturer for the “specified brands or products” (“the” manufacturer), who (2) is the entity that transfers the product to “its distributor” or, at the very least, controls distribution of the brand to that distributor.

On that last point, interpreting the statute to define the manufacturer in terms of who controls the distribution decision makes some sense. After all, the purpose of Ohio’s franchise law is to ensure that those who control distribution of a given brand don’t decide to shift their business from one distributor to another, thereby taking unfair advantage of the goodwill that the original distribution relationship created. In other words, the franchise law prevents a certain form of upstream opportunism. As another judge in this District described it:

[T]he Alcoholic Beverage Franchise Act is designed in part to protect distributors from certain practices of beverage manufacturers. It recognizes that distributors often have a substantial investment in their businesses, including the physical assets and real property used to distribute the manufacturers’ products, and that to allow a manufacturer unilaterally to terminate a franchise agreement puts the franchise distributors at great risk of harm. The just cause requirement for [*17]  terminating a franchise agreement is intended to protect the franchisee from this type of arbitrary and potentially coercive act.

Beverage Distributors, Inc. v. Miller Brewing Co., No. 2:08-cv-1112, 2009 U.S. Dist. LEXIS 66940, 2009 WL 1542730, at *5 (S.D. Ohio June 2, 2009). On that account, the act protects the franchisee from the entity that has the power to “unilaterally … terminate a franchise,” and thus could otherwise act opportunistically.

Adding further weight to this interpretation, Cavalier itself seems to concede that brand control matters. It claims in the Motion that it has a strong likelihood of success precisely “because Brouwerij 3 Founteinen and De La Senne have never changed hands and continue to enjoy ownership and control over their own brands.” And it doubles down on the importance of control in its Reply, noting that “[t]o be sure, whether an entity is a ‘manufacturer’ under the [Ohio Alcoholic Beverage Franchise Act] is about the level of control that entity has over the actual brands being sold.” 

But if control matters, Cavalier has a problem. The facts suggest Shelton Brothers, not the Breweries, exclusively controlled “the actual brands” in the United States prior to Shelton Brothers’ bankruptcy. Indeed, the hearing testimony showed that the industry called these products the “Shelton Brothers portfolio” or the “Shelton Brands.” And from the evidence presented so far, it appears that the Breweries themselves exercised no meaningful control over who distributed their beers, leaving that decision entirely to Shelton Brothers (and apparently now to Lime [the new importer]). So if the unilateral ability to control product distribution matters in deciding who is a manufacturer for purposes of Ohio’s alcoholic beverage franchise law, then Shelton Brothers (and now Lime), not the Breweries, appears to qualify for that role on the facts here.

To be sure, Cavalier pushes back on that conclusion, focusing on the control the Breweries did exercise. Cavalier notes the Breweries own the trademarks and have the right to terminate Shelton Brothers/Lime if the Breweries do not like who the importer chooses for distribution. But as to the first, it is not clear that owning the trademark, without more, amounts to “controlling” the brand for purposes of Ohio’s franchise law. Rather, control of the distribution decision seems the more relevant factor. And as to the latter, even if the Breweries could exercise control [over] that decision, the evidence does not suggest that they have. To the contrary, as noted, it appears that the Breweries left it entirely to Shelton Brothers, and now Lime, to make those choices.

In short, Ohio’s Alcoholic Beverage Franchise Act could be understood as creating franchise obligations only against the party or parties that select(s) the Ohio distributors, thereby controlling the flow of product into their hands. Under that interpretation, if a brewer takes part in the selection of an Ohio distributor, the brewer has franchise obligations to that distributor. And in that circumstance, a brewer cannot avoid those obligations by interjecting another party, like an importer, into the shipping process. But where, as here, the brewer relinquishes its say over all distribution decisions and the importer takes exclusive control over those decisions, the brewer would not incur franchise obligations under Ohio law. That is not to say that further legal and factual development may not change that conclusion either about the statute’s meaning, or the degree of control that the Breweries exercised here. But for current purposes, given that Ohio’s Alcoholic Beverage Franchise Act at least could be understood this way, Cavalier has not shown that it has a substantial likelihood of success on the merits.

A similar problem prevents Cavalier from establishing a strong likelihood of success on its tortious interference with business relationship claim. In particular, under Ohio law, “[t]he elements of tortious interference with a business relationship are: (1) a business relationship; (2) the tortfeasor’s knowledge thereof; (3) an intentional interference causing a breach or termination of the relationship; and (4) damages resulting therefrom.” Emanuel’s LLC v. Restore Marietta, Inc., No. 22CA6, 2023-Ohio-147, 2023 WL 311525, at *6 (Ohio Ct. App. Jan. 17, 2023). As things stand, the Court is concerned about both Elements 1 and 3. As to the former, it is not clear Cavalier had a “business relationship” with the Breweries (as opposed to with Shelton Brothers). As to the latter, it is not clear that Lime, as opposed to the Shelton Brothers’ bankruptcy, is what “caused the breach or termination” of any relationship between Cavalier and the Breweries.

True, it may be that further development and argument—either as to the law or the facts—could change this conclusion. But on the record for the instant motion, Cavalier has not met its burden of establishing a likelihood of success.

So, it comes down to a relationship with the breweries and not with the importer and the present understanding involves the level of control and involvement the foreign brewery takes in selecting the beer wholesalers. Again, a way for a distributor to press for this, and a good mechanism for achieving representations about the relationship is the distribution agreement with the importer.

In the end, the Court found that the beer wholesaler failed in meeting several of the standards required for issuing an injunction. But the meat of the opinion is found in those paragraphs above involving the Court’s analysis of the relationship between the Belgian brewers, their importer and the interactions and control and involvement in the selection of the Ohio distribution channels and distributor(s). And the decision provides a stark reminder to beer wholesalers to pay attention to contracts with importers for foreign brands and foreign breweries.

Interlocutory appeals from the grant or denial of an injunction are allowed as a matter of right under the federal rules and the beer distributor has filed a notice of appeal to the 6th Circuit court of appeals regarding this matter. This means that the 6th Circuit will review the issue following briefing on the matter – provided the appeal is pressed by the beer distributor and the matter is not settled. So we will have the benefit of appellate review and an assessment of the District Court’s interpretation of the Ohio beer franchise statute by the 6th Circuit.

You can read the complaint that the beer distributor filed here.You can find the full order denying the beer wholesaler’s request for an injunction here.

The post Court rules beer franchise law may not apply to foreign breweries (and their beer) where wholesaler did not engage with foreign breweries or implicate them in contracting with their U.S. importer for distribution. appeared first on Libation Law Blog.