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Major alcohol suppliers, local distributors face off in court over Franchise law – could reshape the way wine and spirits are distributed in Missouri

 

BZKM MAJOR BRAND-11905023

Friday 8/3/2007–Dawn Dodson pushes boxes along the mixed-case line at Major Brands Premium Beverage Distributors as she talks via a headset with a dispatcher that directs her on which bottle of alcohol to include in the customers order. In the course of the evening over 21,000 bottles of alcohol will be moved on this line. Mixed-case means that the cases are comprised of different types of spirits, whole cases are moved on another line. Kevin Manning | Post-Dispatch

A battle brewing in local courtrooms and in Jefferson City could dramatically reshape the way wine and spirits are distributed in Missouri.
Lawsuits involving the country’s largest liquor suppliers began piling up in federal court in St. Louis in recent months as they seek to end deals with local distributors.

The most recent one was filed last week, which pits St. Louis-based wine distributor, Garco Wine Co., against Constellation Brands in Victor, N.Y..

Spirits suppliers Diageo Americas and Bacardi USA already have filed suit against St. Louis-based Major Brands, the state’s largest wine and spirits distributor, seeking to terminate distribution deals. Alcohol importer Pernod Ricard also filed suit against Major Brands and St. Charles-based Glazer’s Midwest, a unit of Dallas-based Glazer’s Inc.

While the litigation unfolds, Missouri lawmakers are renewing efforts to change state liquor laws to help local distributors, a year after similar legislation was vetoed by Gov. Jay Nixon.

CONSOLIDATION

After the repeal of Prohibition in 1933, the three-tier distribution system was created. It requires alcohol producers and suppliers to sell their products to distributors, who then sell the beverages to retailers.
In Missouri, the Franchise Act was amended in 1975 to clarify that liquor distributors’ relationships with their suppliers were deemed franchises.

But in recent years, legal efforts to challenge distributors’ status as franchisees have intensified, as suppliers seek to consolidate the number of distributors they use across the country to cut costs.

Opponents say consolidation will be the death knell for independent distributors like Garco Wine and lead to a handful of megadistributors that are more difficult to regulate for state authorities.

The ruckus in Missouri started with a 2011 federal court decision that gave suppliers the upper hand. In Mo. Bev. Co. vs. Shelton Bros. Inc., the U.S. District Court for the Western District of Missouri ruled that a business relationship between Missouri Beverage Co., a distributor, and Shelton, a Massachusetts-based supplier, was not that of a franchisee-franchisor under Missouri law.

The court reasoned that a franchise relationship didn’t exist because Shelton hadn’t granted Missouri Beverage the use of its trademarks. It also ruled that a “community of interest” didn’t exist between the two parties, in part, because Missouri Beverage wasn’t economically dependent on Shelton.

That ruling — which was affirmed last year by the 8th U.S. Circuit Court of Appeals — prompted distributors, including Major Brands, to support legislation last year to rewrite Missouri law to make it more difficult for suppliers to terminate their relationships with distributors.

But the legislation was vetoed by Nixon in July, in part, because of a potential negative impact on the state’s wine growers.

As similar legislation is pending before the Missouri Legislature, suppliers are taking this window of opportunity to terminate their agreements with distributors.

In late March, Constellation Brands — one of the largest wine and spirits suppliers in the country, with brands including Robert Mondavi and Svedka vodka — notified St. Louis-based Garco Wine that it would stop fulfilling its orders, effective April 30.

Garco, which has distributed Constellation’s brands in Missouri since 2004, sued Constellation in federal court in St. Louis on Tuesday, alleging Constellation wrongfully terminated its franchise relationship with Garco without good cause, thus violating Missouri law.

Garco’s sales of Constellation products totaled more than $5.6 million last year, representing 37 percent of Garco’s total sales revenue. That high level of sales constitutes a “community of interest” between the parties that offers protections to Garco under Missouri law, Garco argues in its lawsuit.

The breakup between the two companies occurred after Constellation demanded a change to their agreement.

The wine and spirits supplier asked Garco to submit a proposal as part of a “request for commitment” process — essentially asking Garco to accept that its agreement with Constellation was over and that it would have to reapply.

To participate in the proposal process, Constellation asked Garco to relinquish its rights to sell Constellation products and release Constellation from lawsuits and other claims related to the termination of its distributor agreement with Garco.

Garco refused, and alleged in its breach of contract lawsuit that Constellation is prohibited under Missouri law from terminating their agreement without good cause.

“If Garco’s relationship is terminated by Constellation Brands, Garco will lose its customers and those business relationships it developed to a new wholesaler appointed by Constellation Brands, despite the fact that it was Garco’s efforts and business acumen that cultivated those relationships for the sale of Constellation Brands’ products in Missouri,” Garco states in the suit.

An attorney representing Garco and its president, Michael Cohen, declined to comment. Constellation also declined to comment on the lawsuit.

A FLURRY OF LAWSUITS

In other cases, alcohol suppliers are the ones filing lawsuits against distributors.
In January, New York-based Pernod Ricard USA sued its two Missouri distributors, Major Brands and Glazer’s Midwest, seeking court approval to terminate agreements with both companies. Pernod Ricard’s brands include Absolut Vodka, Kahlúa Liqueur and Seagram’s Extra Dry Gin.

In March, both Diageo Americas Inc. and Bacardi USA also filed suit in federal court in St. Louis, seeking to terminate their distributor agreements with Major Brands, and Major Brands countersued.

In its lawsuit, Pernod Ricard argues Missouri franchise law doesn’t apply to its agreements with Major Brands or Glazer’s because sales of its products at either distributor are no more than 6 percent of their total sales — not enough to constitute a “community of interest,” according to Pernod Ricard.

While that case is still pending, Pernod Ricard announced Tuesday that it selected Major Brands as its exclusive distributor for all its wine and spirits brands in Missouri, effective May 1, and Glazer’s will continue to distribute Pernod products in Arkansas and Kansas.

“The lawsuit is still pending and at this point, there are no plans to drop it,” said Pernod Ricard spokesman Jack Shea. “Our decision to appoint Major Brands as our distributor in Missouri underscores our belief that market forces are sufficient to determine business relationships.”

NEW LEGISLATION

As the franchise lawsuits make their way through the courts, lawmakers in Missouri again are pushing new legislation, Senate Bill 365 and House Bill 759, that would make it more difficult for alcohol suppliers to sever their relationships with distributors.
This time around, the Missouri Vintners Association, the winery owners group that opposed the legislation last year, is supporting it.

Seeking to block the legislation is the Distilled Spirits Council of the United States, a Washington-based trade group that represents spirits suppliers, which opposes franchise protection for distributors nationally.

“It’s a type of legislation that’s anti-consumer, anti-competitive and violates the spirit of free enterprise,” said Ben Jenkins, the group’s vice president of government communications.

The trade group contends that spirits are vastly different than franchises such as Dairy Queen or McDonald’s restaurants because alcohol distributors distribute hundreds of other brands from competitors. “There’s no community of interest (with spirits),” Jenkins said.

But some distributors disagree, including Major Brands, a family-owned distributor that got its start in 1934 and has grown to more than 700 employees statewide. Its wine and spirits business totals $430 million in annual revenue.

Susan McCollum, Major Brands’ chairman and CEO, declined to comment on the pending lawsuits, but she said she supports the proposed bills in the Missouri Legislature that would strengthen protections for distributors.

She also is closely watching a case that’s before the 8th U.S. Circuit Court of Appeals — Southern Wine and Spirits of America vs. Missouri Division of Alcohol and Tobacco Control. In that case, which had oral arguments last week, Miami-based Southern Wine and Spirits argues that a Missouri law that requires a residency requirement for distributors is unconstitutional.

Regarding the proposed legislation, McCollum said if it doesn’t pass, it will lead to more consolidation in the industry, hurting Missouri businesses and consumers.

“The federal court decision created confusion and uncertainty, and we’re merely seeking to clarify Missouri law that we’ve abided by for decades,” she said. “Without this clarifying legislation, our state runs the risk of losing hundreds of good jobs and a homegrown, Missouri-based business with deep roots in the communities it has served for nearly 80 years.”

Source: St. Louis Post Dispatch

http://www.stltoday.com/business/local/major-alcohol-suppliers-local-distributors-face-off-in-court/article_b8172686-7381-5771-b357-0a2a65467299.html