Jun 12, 2017 - Franchise Articles by |

Beer Brewer’s Wrongful Termination of Dealer Turns Out to be Grist for the Mill for Beer Distributor

By: Jeffrey M. Goldstein

The U.S. District Court for the Western District of Washington recently ruled that a terminated beer franchisee could sue the beer manufacturer for non-statutory damages caused by the franchisor’s termination of the distribution contract without cause. Odom Corp. v. Pabst Brewing Co., No. C17-5279-RBL, 2017 U.S. Dist. LEXIS 81348 (W.D. Wash. May 26, 2017). As the Court phrased the issue: “This case concerns whether, when a beer supplier terminates its distributor’s contract without cause, Washington’s Wholesale Distributors and Suppliers of Spirits or Malt Beverages Act, chapter 19.126 RCW, provides the distributor with a single remedy: ‘compensation from the successor distributor for the laid-in cost of inventory and for the fair market value of the terminated distribution rights.’”

The case is interesting for four reasons. First, even though almost every state has beer distribution relationship legislation, there is a dearth of reported decisions regarding beer franchise terminations; this is primarily because almost all replacements of beer distributors are negotiated and include the payment of agreed-upon fair market value.

Second, Pabst’s defenses in the case were not traditional ‘good cause’ arguments usually asserted to justify a termination; instead, the beer franchisor embraced a troika of somewhat absurd schoolyard bully arguments, to wit: the rules in the statute (enacted to prevent unjust terminations by brewers) don’t apply to me (even though I’m a brewer); the rules in the beer franchisor act allow terminations at-will for no reason (even though the statute was enacted in large measure to prevent unjust terminations without cause); and, that even assuming the beer franchise act’s termination provisions do apply to me (a brewer), the act’s requirement that a newly-chosen replacement distributor must pay the fair market value of the distribution rights to the wrongfully terminated distributor prevents the terminated distributor from suing the brewer for all other damages caused by the termination.

Third, the case highlights a state beer termination statute that provides broad-sweeping and tangible rights to beer brewers; such protections for brewers are beyond rare, as most beer franchise legislation focuses almost exclusively on providing rights only to distributors to make up for the enormous economic disparity that has historically existed between brewers and distributors.

Fourth, the specific beer franchise act in the case is yet again another piece of lengthy and complex franchise legislation that has been written ineffectively, slackly, and blurrily; how difficult is it for state legislatures to explicitly outlaw all terminations that are at-will and without cause?

The facts underlying the dispute were relatively simple and undisputed: On February 16, 2017, Pabst, the beer brewer, notified one of its distributors, Odom, that Pabst planned to terminate their agreement. Eight days thereafter Pabst terminated Odom’s distribution agreement, and in another day Pabst arranged for Columbia Distributing to take over Odom’s former territory. At the time of the suit, Columbia had purchased Odom’s existing inventory, but Columbia and Odom had not yet come to an agreement on the fair market value of Odom’s terminated distribution rights. (In addition to Odom, two other distributors sued Pabst for identical claims – that they allegedly were abruptly terminated so that Pabst could turn over their businesses to Columbia.)

In the suit, Odom sued Pabst for lost profits, business interruption, lost investment, reliance damages, and other losses, alleging Pabst had breached the distribution agreement by terminating it without cause and by failing to provide 60 days written notice of its intent to terminate. Pabst moved to dismiss Odom’s complaint arguing that under the Act, Odom’s only viable, remaining claim was against Columbia Distributing for the fair market value of Odom’s terminated distribution rights. Of course Odom disagreed with the brewer, contending that the Act does not authorize terminations without cause and did not include a statement of exclusivity regarding a damages suit; specifically, Odom argued that RCW § 19.126.040(4) provides a cumulative remedy for distributors whose agreements have been wrongfully terminated, to wit, statutory compensation from the successor distributor, as well as the common law breach-of-contract damages from the brewer.

Based on the parties’ arguments, the Court proceeded to answer two legal questions: (1) whether the Act authorizes suppliers to terminate distributors’ contracts without cause and (2) whether RCW 19.126.040(4) provides Odom’s sole remedy for relief.

The Act Does Not Permit Termination of a Distribution Agreement without Cause

Pabst argued that it was permitted to terminate Odom’s agreement without cause because: (1) the Act contemplated such terminations without cause, and (2) their agreement permitted either party to cancel it at will after “a reasonable time.” The Court began its analysis of the former issue by pointing out that the Act requires a brewer to give a distributor at least 60 days written notice and an opportunity to cure before terminating a distributor, unless the distributor acts fraudulently, the distributor declares bankruptcy or loses a license, or the brewer acquires a new brand and has another distributor handle it.

Next, the Court pointed out that RCW § 19.126.040(2) “notably” does include without-cause terminations in the situations it exempts from the Act’s notice and opportunity-to-cure requirements. In this regard, the Court emphasized this omission by explaining that the omission exists “even though the Legislature fully knew that suppliers sometimes terminate a distributor’s rights without cause, and in fact used this language only two paragraphs later . . . (‘If an agreement of distributorship is terminated, canceled, or not renewed for any reason other than for cause, … 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.’)”

The Court here also explicitly rejected Pabst’s attempt to use the Act’s language to bolster the brewer’s argument that the Act permitted terminations without cause:

Pabst incorrectly asserts that the Act’s acknowledgment of without-cause terminations in RCW 19.126.040(4) is synonymous with its authorization of them. It is not. Had the Legislature intended to permit suppliers to cancel a distributor’s rights without cause, it would not have mandated that in most circumstances, a distributor must have an opportunity to cure the cause leading to its potential termination. The absence of “any reason other than for cause” from RCW 19.126.040(2)’s list of exemptions from the Act’s notice and opportunity-to-cure requirements similarly evidences the Legislature’s intent that a distributor’s rights not be terminated without cause.

The Court further justified its view that the Act did not authorize terminations without cause by contrasting the Act with similar beer legislation from Colorado:

Had the Legislature intended to permit suppliers to cancel distributorships without cause, it also could have borrowed language from Colorado’s beer distributor statute: ‘The supplier shall have the right to terminate an agreement with a wholesaler at any time by giving the wholesaler at least ninety days’ written notice….”’ Colo. Rev. Stat. Ann. § 12-47-406.3(3).

The absence of any such language in the Act, according to the Court, confirmed that the Act “does not include such or similar language, it does not grant suppliers permission to terminate a distributor’s rights without cause.”

The Agreement Does Not Permit Termination of a Distribution Agreement without Cause

Pabst next argued that the distribution agreement with Odom allows for either party to terminate their agreement at will under prior state case law, including Birkenwald Distributing Co. v. Heublein, Inc. and Cascade Auto Glass, Inc. v. Progressive Casualty Insurance Co. The Court rejected the applicability of Birkenwald, a case involving a contract that allowed a supplier to terminate its agreement with a distributor at will, because that case involved a contract that had been executed before the Act was established. Similarly, the Court distinguished the Cascade case because, according to the Court, it involved a terminable-at-will insurance agreement, the termination of which included the provision of “provid[ing] reasonable notice to the other [party].” In Pabst, however, the Court found that Pabst “points to no language in its contract with Odom suggesting it is a terminable-at-will contract to which Birkenwald’s and Cascade’s reasoning applies.”

The Court next examined the Pabst distribution agreement’s specific language regarding when Pabst was permitted to cancel it. In so doing, the Court identified two provisions in the agreement, which appear to be taken directly from the Act. The first provision “allows Pabst to terminate with sixty-days written notice if Odom submits an inaccurate application; commits fraud; attempts an unauthorized change in control or ownership; has its license or permits suspended or revoked; sells altered products; commits appointment, assignment, or amendment violations; fails to comply with an audit; receives a felony conviction; or becomes insolvent.” The second provision “permits Pabst to terminate if after notice and a sixty-day opportunity to cure, Odom continues to violate their agreement.”

Based on its reading of the two above clauses, the Court ruled that “The contract does not permit Pabst to cancel it ‘at any time’ after sixty days written notice, as it does for Odom . . . The contract therefore does not allow Pabst to terminate Odom’s distribution rights without cause.”

The Court also turned one of Pabst’s supporting cases on its head, stating that Birkenwald undercuts Pabst’s interpretive arguments of the Act because in that case, according to the Court, “the court, and the parties, recognized that the 1984 Wholesale Distributors and Suppliers Act did not include a right for suppliers to terminate distribution contracts at will.” Similarly, in Birkenwald, “the court understood that the Wholesalers Distributors and Suppliers ‘Act grants several protections to wholesale distributors of wine and malt liquor, including a right of at least sixty days prior written notice of the supplier’s intent to cancel a distribution agreement’ that outlines the reasons for the intended cancellation and a right to rectify the claimed deficiency within sixty days.”

The same protections apply to distributors today.

The Act Does Not Preclude a Distributor from Obtaining Non-Statutory Damages

Pabst also argued that, even assuming the Act barred it from terminating a distributor without cause, Odom was not permitted to seek damages that were not provided for explicitly in the Act. As the Court explained Pabst’s argument: “the Act governs the entire relationship between a distributor and its supplier, and when a supplier terminates a distribution contract, the successor distributor makes the terminated distributor whole by purchasing its existing inventory and paying it the fair market value of the distribution rights it formally [sic] held.” According to Pabst, the Court should “dismiss the case because Odom’s only recourse is to seek payment from Columbia in arbitration.” Odom urged the Court to reject Pabst’s argument, contending that “the Act creates an additional remedy for terminated distributors; it does not, nor was it intended to, eviscerate their rights under the common law and to immunize suppliers from liability when they cancel an agreement without cause.”

The Court began its analysis of the exclusivity of the remedy by examining the language of the statutory remedy in the Act: “if a supplier terminates a distributorship without cause and contracts with a new distributor, the successor distributor must purchase the terminated distributor’s existing inventory and compensate it for the fair market value of its lost distribution rights.” The Court next noted that “The Act also prevents a terminated distributor from receiving a windfall, and the fair market value of distribution rights from being falsely inflated, by discounting the amount a successor owes (for the rights) by any amount already paid.”

Pabst argued that Potter v. Washington State Patrol provides the framework for analyzing whether statutory remedies are exclusive or cumulative. Although the Court agreed that this was the right framework, it ultimately ended up ruling against Pabst on the merits. While the facts of Potter (involving a vehicle impounded by the Washington State Patrol) are not relevant, the case itself was useful to the Court because of the framework it elucidated.

According to the Court, under Potter, courts should hesitate to find that statutory remedies fully replace common law remedies, unless there is an explicit statement from the legislature to that effect. The Court also looked at Norfolk Redevelopment & Hous. Auth. V. Chesapeake & Potomac Tel. Co. of Va., which stated: “It is a well-established principle of statutory construction that the common law ought not to be deemed repealed, unless the language of a statute [is] clear and explicit for [that] purpose.” If there is no such explicit language in the putative statute, the Court explained that courts should then examine “other manifestations of legislative intent,” such as a statute’s provisions, whether the statutory remedy and the common law remedy can operate in tandem, as well as “the adequacy or comprehensiveness of the statutory remedy, the statute’s purpose, and whether the common law remedy predates the statutory remedy.”

The Act Does Not Evince Legislative Intent to Make Statutory Remedies Exclusive

Pabst argued that because the Act provides for specifically defined remedies in the event of a termination without cause, this must mean that these remedies are exclusive. Pabst further argued that because the statutory remedy must be provided by the new distributor and not by the terminating supplier, the supplier cannot be liable for any damages claim. “Pabst argues the Act contains a statement of exclusivity because (1) if a distributor agreement is not renewed for any reason other than one for cause, RCW 19.126.0404(4) limits the terminated distributor to recovering the fair market value of its formerly-held rights from the successor distributor, and (2) RCW 19.126.040(5) prohibits a terminated distributor from recovering damages from a supplier or a third party.”

The Court disagreed, finding that the Act does not prohibit payments by the terminating supplier, stating: “[the Act] allows suppliers and successor distributors to negotiate between themselves who will compensate the terminated distributor for its lost distribution rights, and if they decide both will, allows them to determine how much each will contribute.” The Court also noted that Pabst’s interpretation of the Act would be very one-sided, because “[u]nder Pabst’s interpretation, a supplier could terminate a distributor’s contract without cause and could take its operations in-house without owing the terminated distributor any compensation. The statute’s provisions do not evidence a clear intent to effectuate such an imbalance between suppliers and distributers.”

Further, by contrasting the Act with other statutes that have explicit language regarding the exclusivity of their remedies, the Court found that there is no language in the Act defining the remedies as exclusive:

[T]he statute governing health care peer reviews in Washington says, “[T]his section shall provide the exclusive remedies in any lawsuit by a health care provider for any action taken by a professional peer review body of health care providers….” RCW 7.71.030 (2013). And the Industrial Insurance Act “abolished” all civil actions, creating a new statutory remedy “to the exclusion of every other remedy, proceeding or compensation,” when it announced that the common law system governing workers’ compensation contradicts modem industrial conditions. RCW 51. 04.010 (2017). Similarly, Colorado’s and Kentucky’s beer distributor statute’s declare arbitration to be the sole remedy for relief available to a terminated distributor disputing the fair market value of its lost rights (when a supplier transfers its business to a successor supplier, and the successor supplier hires a successor distributor). See Colo. Rev. Stat. Ann. § 12-47-406.3(4)(c)(V) (“Any arbitration held pursuant to this paragraph (c) shall be in lieu of all other remedies and procedures.”); see also Ky. Rec. Stat. Ann. § 244.606(2)(h) (“Any arbitration held pursuant to this subsection shall be instead of all other remedies and procedures.”).

The Act contains no such similar language.

Further Inquiry Does Not Evidence Legislative Intent to Make Remedies Exclusive

Finding no explicit language evidencing legislative intent for the statutory remedies to be exclusive, the Court turned to other manifestations of legislative intent, namely, “the adequacy or comprehensiveness of the statutory remedy, the statute’s purpose, and the statute’s origin.”

The Court found that the Act was not comprehensive because it is limited in scope. The Act only addresses damages caused by the loss of the distribution rights, and does not consider reliance damages or lost profits.  “The Act’s limited scope demonstrates it created a cumulative remedy for distributors terminated without cause.”

The Court next turned to the Act’s purpose, and its date of passage. Looking at the text of the Act, the Court found that Pabst’s interpretation of the Act was at odds with the stated purpose of the Act: “[t]he Act encourages suppliers and distributors to serve the public ‘through the fair, efficient, and competitive distribution of’ spirits and malt beverages, RCW 19.126.010. It does not aim to immunize suppliers from liability from wrongdoing or to pass off their liabilities to third parties.”

Further, the act was created in 1984, which postdates the common law right to bring a claim for a breach of contract. Using Potter as authority, the court found that “[w]here the statutory remedy postdates the common law remedy, a court infers the statutory remedy is cumulative, not exclusive.”

In conclusion, the Court found the Act does not prevent distributors from pursuing a breach of contract claim against suppliers. The Court also found that Odom had asserted a plausible claim which it may pursue against Pabst.

 Skirting the Free Market

A recent Seattle Times article about the case seemed to suggest that the abrupt terminations were the result of normal market forces in a “rough-and-tumble sector where the big are always getting bigger.” More specifically, the article pointed out that “streamlining delivery is paramount for brewers and their distributors because the beer market is not growing …” The article also explained that the pressure to consolidate distribution was especially acute for Pabst “because it has acquired so many older beer brands carried by different, sometimes competing, distributors.” Even assuming all of this is true, however, it does not justify a brewer’s simply carrying out three drive-by terminations (without compensation) of several long-standing family-owned distribution businesses simply to achieve cost efficiencies in distribution.

Putting aside for the moment whether such franchisor cost efficiencies could legally justify a termination under good-cause franchise termination statutes, it should not be forgotten that overall allocative efficiency eventually will naturally  deteriorate to the extent that franchisors fail to fully compensate the replaced distributor for the full value of its investment. This, in turn, prevents consumers from obtaining products and services – here, Pabst beer — at the lowest competitive prices, which, after all, is supposed to be what the free market is all about.

 

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