Monday, November 13, 2006

Network Consolidation Was Cause for Termination Under New York Beer Distribution Law

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

The U. S. importer of a Canadian brewer’s products could terminate its agreement with a New York wholesaler—pursuant to its national policy of consolidation of its wholesaler network—without violating the New York beer law, an arbitrator in New York City has decided. (Molson USA, LLC v. John G. Ryan, Inc., AAA Case No. 15 181 00640 05, November 6, 2006.)

As required by Section 55-c-7 of the New York Alcoholic Beverage Control Law, the importer would be required to pay the wholesaler the fair market value of the distribution rights that would be lost or diminished by reason of the termination, together with the fair and reasonable compensation for other damages suffered. The importer’s policy was "reasonable, nondiscriminatory and essential" as required by the statute and the distributor acted in "good faith" regarding the proposed termination, the arbitrator determined.

Under a mandatory arbitration clause in the parties’ agreement, the importer sought (1) a declaratory judgment that it had the right to terminate the agreement and appoint a wholesaler of its own choosing and (2) a determination of the amount of compensation due the wholesaler by virtue of the termination. In the event the parties were unable to reach an agreement about the amount of such compensation, the amount would be determined during the second phase of the arbitration proceeding, according to the arbitrator.

The beer distribution section of the New York Alcoholic Beverage law provided that a brewer (or its agent, such as the importer) could terminate a wholesaler only for "good cause." The good cause requirement established standards that had to be met by a brewer in order to justify termination as part of a national or regional policy of consolidation. In relevant part, the statute specified that good cause for termination pursuant to such a policy was limited to: "[t]he implementation by a brewer of a national or regional policy of consolidation which is reasonable, nondiscriminatory and essential. Such policy shall have been previously disclosed, in writing, in reasonable detail to the brewer's wholesalers, and shall result in a contemporaneous reduction in the number of a brewer's wholesalers not only for a brand in this state, but also for a brand in contiguous states or in a majority of the states in which the brewer sells the brand."

Amendments to the beer law that changed the statute’s definition of good cause for termination as part of policy of consolidation were made in 2001, during the pendency of the parties’ agreement. These amendments were applicable to the agreement, despite a claim that they would impair an existing contract in violation of the Contracts Clause, the arbitrator ruled. Following the rationale of Garal Wholesalers, Ltd. V. Miller Brewing Co. (751 N.Y.S.2d 679, 2002), the statute and the 2001 amendments were remedial in nature and should be applied retroactively to avoid undermining its remedial purpose, the arbitrator determined. The changes were not drastic and did not rise to the level of substantial impairment.

The importer’s proposed termination of the wholesaler was "nondiscriminatory" within the meaning of the statute, according to the arbitrator, because the national plan of consolidation had been in effect since 2001 and had been pursued steadily since that date. The distributor’s efforts to stage its consolidation efforts consistent with the limitations of state law and the need to operate its business did not constitute discrimination, the arbitrator reasoned.

Factors such as cost savings to the importer and its corporate parent, avoidance of financial losses, increases in efficiency, and focus on the brands that contributed to increased revenues satisfied the statutory requirements that a plan be reasonable and essential, the arbitrator ruled.

Finally, the distributor acted in "good faith" under the meaning of the statute with regard to its proposed termination of the wholesaler, according to the arbitrator. A brewer did not fail to act in good faith by implementing a policy of consolidation over time. State law and the need to run a business permitted a brewer to achieve its consolidation in stages, the arbitrator reasoned.

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