A Court’s grant of an injunction to a beer distributor prohibiting Constellation from moving its brands to a new wholesaler in Washington State has set the stage for a fully briefed and soon to be argued 9th Circuit case that is certain to set an important precedent for interpreting state beer franchise laws.

That’s because the titular question, does the Washington state beer franchise law (RCW Chapter 19.126) allow a brewer or other supplier to terminate a distribution agreement without good cause provided they pay fair (or “just”) compensation, is being argued mainly from the point of statutory construction.  And the parties and the amici are citing and developing analogies to multiple other state beer franchise laws along the way. You can see the importance of this issue. 

A finding that particular language and a parsing of the various options and statutory phraseology allows or does not permit termination without cause will provide some persuasive precedent regarding similar language in other jurisdictions.

In arguing that a court grant credence to one-side’s interpretation of the franchise statute the 9th Circuit, should it decide the issue and not send it to the Washington Supreme Court as a certified question will be providing precedent that will be cited nationally in disputes across the country where challenges to the interpretation of state beverage franchise protections involve ambiguity about the language concerning the availability of terminations without cause.

Here are the documents:

Here is the relevant statutory provision everyone is focused on:

RCW 19.126.040 – Distributors’ protections.

Wholesale distributors are entitled to the following protections which are deemed to be incorporated into every agreement of distributorship:

(1) Agreements between wholesale distributors and suppliers must be in writing;

(2) A supplier must give the wholesale distributor at least sixty days prior written notice of the supplier’s intent to cancel or otherwise terminate the agreement, unless such termination is based on a reason set forth in RCW 19.126.030(5) or results from a supplier acquiring the right to manufacture or distribute a particular brand and electing to have that brand handled by a different distributor. The notice must state all the reasons for the intended termination or cancellation. Upon receipt of notice, the wholesale distributor has sixty days in which to rectify any claimed deficiency. If the deficiency is rectified within this sixty-day period, the proposed termination or cancellation is null and void and without legal effect;

(3) The wholesale distributor may sell or transfer its business, or any portion thereof, including the agreement, to successors in interest upon prior approval of the transfer by the supplier. No supplier may unreasonably withhold or delay its approval of any transfer, including wholesaler’s rights and obligations under the terms of the agreement, if the person or persons to be substituted meet reasonable standards imposed by the supplier;

(4) If an agreement of distributorship is terminated, canceled, or not renewed for any reason other than for cause, failure to live up to the terms and conditions of the agreement, or a reason set forth in RCW 19.126.030(5), the wholesale distributor is entitled to compensation from the successor distributor for the laid-in cost of inventory and for the fair market value of the terminated distribution rights. For purposes of this section, termination, cancellation, or nonrenewal of a distributor’s right to distribute a particular brand constitutes termination, cancellation, or nonrenewal of an agreement of distributorship whether or not the distributor retains the right to continue distribution of other brands for the supplier. In the case of terminated distribution rights resulting from a supplier acquiring the right to manufacture or distribute a particular brand and electing to have that brand handled by a different distributor, the affected distribution rights will not transfer until such time as the compensation to be paid to the terminated distributor has been finally determined by agreement or arbitration;

(5) When a terminated distributor is entitled to compensation under subsection (4) of this section, a successor distributor must compensate the terminated distributor for the fair market value of the terminated distributor’s rights to distribute the brand, less any amount paid to the terminated distributor by a supplier or other person with respect to the terminated distribution rights for the brand. If the terminated distributor’s distribution rights to a brand of spirits or malt beverages are divided among two or more successor distributors, each successor distributor must compensate the terminated distributor for the fair market value of the distribution rights assumed by that successor distributor, less any amount paid to the terminated distributor by a supplier or other person with respect to the terminated distribution rights assumed by the successor distributor. A terminated distributor may not receive total compensation under this subsection that exceeds the fair market value of the terminated distributor’s distribution rights with respect to the affected brand. Nothing in this section may be construed to require any supplier or other third person to make any payment to a terminated distributor;

(6) For purposes of this section, the “fair market value” of distribution rights as to a particular brand means the amount that a willing buyer would pay and a willing seller would accept for such distribution rights when neither is acting under compulsion and both have knowledge of all facts material to the transaction. “Fair market value” is determined as of the date on which the distribution rights are to be transferred in accordance with subsection (4) of this section;

(7) In the event the terminated distributor and the successor distributor do not agree on the fair market value of the affected distribution rights within thirty days after the terminated distributor is given notice of termination, the matter must be submitted to binding arbitration. Unless the parties agree otherwise, such arbitration must be conducted in accordance with the American arbitration association commercial arbitration rules with each party to bear its own costs and attorneys’ fees;

(8) Unless the parties otherwise agree, or the arbitrator for good cause shown orders otherwise, an arbitration conducted pursuant to subsection (7) of this section must proceed as follows: (a) The notice of intent to arbitrate must be served within forty days after the terminated distributor receives notice of terminated distribution rights; (b) the arbitration must be conducted within ninety days after service of the notice of intent to arbitrate; and (c) the arbitrator or arbitrators must issue an order within thirty days after completion of the arbitration;

(9) In the event of a material change in the terms of an agreement of distribution, the revised agreement must be considered a new agreement for purposes of determining the law applicable to the agreement after the date of the material change, whether or not the agreement of distribution is or purports to be a continuing agreement and without regard to the process by which the material change is effected.

The beer wholesaler won the injunction and the opinion granting it justified the injunction by interpreting the beer franchise law to exclude not-for-cause “at-will” terminations finding that the form of not-for-cause terminations that are implied by the statute involve either 1) a new supplier taking over the brand and moving it to a new distributor, or 2) a distributor agreeing to termination without cause and accepting compensation.

The wholesaler stands in a good position here as they have precedent on their side from some prior interpretations of the statute finding that the not-for-cause at-will type terminations are not expressly stated in the statute and are therefore not allowed.

From a statutory interpretation perspective, Constellations’ argument involves parsing the statute and asking for a more nuanced reading:

“The district court’s reading of RCW 19.126.040 also failed to acknowledge the Legislature’s use of different words, and instead conflated the Act’s use of “reason,” “deficiency,” and “cause” to mean the same thing. When the Legislature uses certain language in one place, but different language in another, the terms must be read to mean different things. Here, the Legislature provided that a supplier must provide 60 days’ written notice of termination of distribution rights. RCW 19.126.040(2). In this notice, the supplier must state the “reason” for the termination; if the notice identifies “any deficiency,” the distributor must be given the right to cure within 60 days. By using different words for “reason” and “deficiency,” the Legislature intended that the reason for the termination need not include a curable deficiency. A without-cause termination would not include a curable deficiency. The Legislature then used different language—“reason other than for cause”—to describe when the compensation for termination provisions would apply. In other words, the “reason” for the termination need not be a curable deficiency and could include without-cause terminations.”

They make this argument and develop it in several places. The best example is in their reply brief at pages 9-11. 

This is an interesting argument as the statute’s use of the word “any” in Section 19.126.40(2) stating that the distributor will have 60 days to cure any claimed deficiency, – if that were a mandate for termination requiring justification, the statute would ready “each” claimed deficiency, or “all the” claimed deficiencies or some other word implying that there must be deficiencies and not the indefinite quantity “any” which renders it permissive and creates an issue here as it is vague.

For my part, I think the best argument for Constellation is the argument advanced against the assertion that there is no explicit allowance of without cause terminations is that the statute proposes two separate methods for termination: 1) a for cause/not living up to the terms of the agreement termination where a supplier would not need to pay fair compensation but must provide notice and a chance to cure if deficiencies exist and 2) a not for cause/deficiency termination where the fair compensation is owed. On this, Section RCW 19.126.040(4) is clear. So, the not-for-cause termination right has to exist (i.e., the type of termination where fair compensation is owed), because the statute acknowledges it and the fight is really about whether not-for-cause means “at will” termination or something else. I for one cannot imagine what else it could mean other than an “at-will” ability to allow the supplier to pay to simply be done with it following providing a subsection 19.126.040(2) 90 day notice stating the reason for termination (we have a contractual right to terminate or we do not want to renew) and not “any” deficiencies so there is nothing to correct. And none of the briefs mentions or discusses what could be a grounds other than at will not-for-cause termination that would be the type of effective termination that requires fair compensation in RCW 19.126040(4) as not living up to the contract, for cause, and the stated statutory reasons in 16.126.030 all allow for termination without paying fair compensation. That not living up to the terms of the agreement issue is important, that’s a breach. If breach is separated from the forms of termination and there must be something other than a breach that is a reason for termination because that is how the second option, the one where compensation is paid, exists, what else could a contract termination be than an at will termination? The District Court opinion said this would be when a new supplier takes over the brand and moves the brand to a new distributor (this is stated in subsection 2 and is not a “for cause” termination or one of the other reasons justifying no compensation) and that it could be the situation where a distributor accepts the termination and just wants compensation. But I believe it could also refer to non-renewal type-terminations, or be only for contracts that do include a termination right – both rights that can arise from the contract’s terms and this contract did have a termination right. 

That’s one other important point raised on appeal is the ability of a contract to allow for such termination in the face of the franchise act. Constellation has raised this as an argument. The parties contract allowed for without-cause termination of the beer distribution agreement through a provision requiring payment:

6.2 The parties agree that due to the built-in uncertainties in the market for the Subject Beverages, including the valuation of good will, Distributor’s profit margins and certain other factors, it would be difficult to determine the actual damages, if any that may result from [Constellation]’s termination of this Agreement. Accordingly, in the event of the termination of this Agreement by [Constellation] without cause, [Constellation] shall give Distributor 30 days written notice of its intent to terminate on this basis, and Distributor during such 30 day period Distributor may transfer its rights to distribute the Subject Beverages to another distributor, subject to [Constellation’s] approval. If, at the end of such 30 day period, Distributor has not transferred its distribution rights to another distributor approved by [Constellation], then [Constellation] shall pay to Distributor in full and complete satisfaction, waiver and discharge of all claims of whatever nature that Distributor may have against [Constellation] and its affiliates, arising out of or with respect to the termination, as liquidated damages and not a penalty, a sum equal to (a) two times Distributor’s Net Effective Profit (as defined in Section 5.6 above) attributable to the sale of the Subject Beverages that are Modelo brands to retailers in Distributor’s territory for the most recent 12-month period, plus (b) Distributor’s Net Effective Profit attributable to the sale of the Subject Beverages other than the Modelo brands to retailers in Distributor’s territory for the most recent 12-month period. All credits and debits incurred in the normal course of business up to the date of termination will be settled between [Constellation] and Distributor. These include promotional allowances resulting from authorized programs, outstanding pre-approved credits, deposits on kegs and pallets, etc. These amounts will be treated separately from the Net Effective Profit calculation. These payments shall be in addition to any amounts payable for inventories under Section 7.3 hereof.

Of course, since the case involves a question of statutory construction of a state law, the 9th Circuit could always punt to the Washington Supreme Court for an answer to a certified question of law – i.e., does the statute allow a supplier to terminate without cause?

This is going to be a fun oral argument and you should follow it. 

Some other neat stuff:

There’s also an attempt in the opening brief that really doesn’t get followed up on later to make an historical claim about the evolution of beer franchise laws.

Unfortunately, much of the “history” being asserted and argued regarding the development of alcohol franchise laws in general is in NO WAY historical analysis or citation to source documentation, contemporaneous records, or any other kind of justification or support that we would expect historical scholars to proffer in defense or support of a position. It is instead, hearsay and unsupported assertion about how things used to be taken from incredibly self-serving and unsupported affidavits provided by the litigants from people that worked in the industry. I.e., not historians.

Also, the main gist of the supplier’s argument and brief opposing the determination that a brewer cannot terminate without good cause is that compensation is the crux of the issue and that the Washington statute allows termination without cause of any agreement provided the terminated distributor is fairly compensated. I.e., any supplier has the right to terminate at any time, provided they pay fair compensation to the distributor. 

In this instance, Constellation has offered roughly $70 million, stated as a 7 times multiple of the plaintiff beer wholesaler’s trailing 12 month gross profits from the sale of Constellation products.

The strategy of the brief is to admit the unequal bargaining power and justification for franchise laws – smaller family run distributors are not in a position to effectively negotiate and protect themselves from the unfair treatment by large breweries and suppliers – and were often terminated without fair compensation. And to argue that the franchise law fixed that imbalance by allowing breweries to terminate their distribution relationships without cause provided they pay fair compensation. 

But, the National Beer Wholesaler’s Association has filed a brief raising an interesting point – what if this is an existential event? How do you peg compensation? Fair market value for the brand does not cover the consequential damage of needing to go out of business and losing all your other brands.

The NBWA argues it in the context of not being able to establish fair compensation in such an event which should justify forbidding not-for-cause “at-will” terminations. See their brief at page 25-26. 

This should pique the interest of others in a similar situation for two reasons, the first is what they’ve stated, consequential damages, although state common law would potentially allow claims for those in addition to the franchise law fair market value claims. The second is that this impact on other brands was a point raised by the district court in granting the injunction. That impact to other brands – the beer wholesaler’s good will in the market with relation to other brands and not the terminated one, was a component of the good will and the potential for losing it was viewed as the justification for finding there would be irreparable harm. A court decision analyzing this issue would provide some welcome elaboration for both the assessment of good will and the types of damages that constitute irreparable harm in disputes between brewers and beer wholesalers over franchise laws.

The post The 9th Circuit will be deciding whether Washington’s beer franchise law allows a supplier to terminate without cause and the case may provide some important precedent. appeared first on Libation Law Blog.