Two bills, more than six lawsuits, at least 34 contract lobbyists, and countless companies are involved in the wine and spirits issue that is progressively rising as legislative session nears its end.
Referred to by some on both sides only half-jokingly as the “liquor wars,” the issue at stake could alter the distribution of the wine and spirits industry throughout the state, which people on both sides of the issue argue will affect consumers. The question is how.
Still, the effect on consumers is only part of the argument. The concern about the competitive nature of Missouri’s wine and spirit industry, potential dangers to retailers, and the jobs of industry employees statewide are also top priority discussion points from both sides.
The issue, which began with a change in the Missouri franchise law following a 2011 federal court case, has resulted in legislation and litigation now before Missouri legislators and company executives.
Background
The repeal of prohibition during 1933 with the 21st Amendment granted states the opportunity to regulate liquor. For Missouri, the jurisdiction of the franchise law belongs to the attorney general’s office.
In 1975, Missouri’s Franchise Act was amended, further clarifying the three-tier system that outlines the relationship between the suppliers, distributors and retailers.
The trigger for the current controversy arose from Missouri Beverage Company, Inc. v. Shelton Brothers, Inc., a 2011 case that was affirmed by the U.S. Court of Appeals Eighth Circuit last year, which established new meaning for the word “franchise” that made the standing Missouri law and three-tier system.
Opponents to the ruling, such as Major Brands, a St. Louis-based distributor, say the definition of “franchise” was distorted, arguing the Court made it more of a “traditional definition.”
It’s because of the ruling that groups, including Major Brands and Glazer’s — another main Missouri distributor, based in Texas — felt prompted to work with the legislature during 2012 to draft a bill that sought to reestablish the clarity of the franchise law to its former status.
Last year’s legislation, Senate Bill 837, sponsored by Sen. Tom Dempsey, R-St. Charles, attempted to do exactly what this year’s almost identical bill does: “to [modify] the definition of franchise under Missouri franchise law, specifically for agreements between alcohol wholesalers and suppliers so that a franchise may exist even without a license to use a trade name, trademark, or service mark and regardless if there is a community of interest in the marketing of the products,” according to the bill’s language.
The bill was vetoed by Gov. Jay Nixon mid-July.
In his veto letter, Nixon said one of his primary concerns was that the franchise law would “threaten to put at substantial risk the gains made by Missouri agriculture since Prohibition, could jeopardize the future growth of Missouri wineries, and make it harder for our soybean growers to develop a market for Missouri-made soy-based beer.”
Nixon also expressed his concern — which opponents of the current legislation argue is still not being addressed — that there is a disturbance in the balance of powers when it comes to negotiating contracts between wholesalers and distributors, saying that distributors have “a bargaining power deficit in contract negotiations.”
Nixon said when a wholesaler underperforms on a contract, the supplier may never succeed in growing sales or “acquire sufficient bargaining power to negotiate better contract terms” because the supplier is dependent on the wholesaler for market access.
“Senate Committee Substitute for Senate Bill No. 837 goes much further than a mere declaration or clarification of legislative intent,” Nixon wrote. “The bill changes the substantive definition of a franchise — a change that appears inconsistent with the legislative intend of the existing law as indicated by the clear meaning of its text.”
Since the veto, the landscape of the interests at play have changed, resulting in legislation the General Assembly currently is dealing with, as well as about six lawsuits.
The litigation
While no contacted parties were at liberty to discuss specifics of any of the litigation, the number of lawsuits that have been filed have changed on an almost weekly basis. In many cases, the litigation involves, the termination of different distributors by wholesalers.
One of the first cases was filed in mid-January, when Pernod Ricard USA, a New York-based wholesaler, filed suit in order to terminate agreements with its two Missouri distributors: Major Brands and Glazer’s.
On April 10, Pernod Ricard announced they were consolidating to one distributor in Missouri, and chose Major Brands.
Jack Shea, spokesman for Pernod Ricard USA, said there still are no plans to drop the lawsuit, but filing it was a difficult decision for the company.
The next lawsuit was filed March 5 when Bacardi USA, a Florida-based company, terminated its contract and sued Major Brands, claiming the agreement between the companies was not protected by Missouri franchise law.
March 6, the next day, Diageo Americas Inc., a Kentucky-based company that is part of one of the world’s largest wholesalers, also terminated its contract and sued Major Brands, which countersued.
Sue McCullom, chief executive officer of Major Brands, said she cannot comment on any of the litigation that her company faces, but said when Major Brands opened in 1934 after the prohibition repeal, the company opened its doors with Diageo brands.
She said Diageo is Major Brands’ largest supplier, representing 42 percent of its spirits business and more than 25 percent of the company’s total revenue. The termination between Diageo and Major Brands will take affect during June.
On March 7, Major Brands sued Luxco — a St. Louis-based supplier that company President Donn Lux said does five percent of its business in-state, and the other 95 percent out-of-state — for reasons independent of the franchise law, but following Luxco’s decision to terminate its relationship with Major Brands and move their products to Glazer’s.
Lux said the decision to move to Glazer’s would have happened regardless of the controversy that’s since occurred with the franchise law lawsuits.
“We felt that Luxco, like others, was prompted by Glazer’s to terminate Major Brands wrongfully as Luxco stated no cause whatsoever for [termination],” McCullom said. She added that Luxco represents one percent of Major Brand’s spirits business and overall business.
Closing the timeframe gap, the next action came from Constellation Brands, another international wholesaler that is headquartered in New York, which terminated all three of its Missouri distributors (Major Brands, Garco and Glazer’s) during the first few days of April. On April 9, Garco filed suit against Constellation Brands for wrongful termination.
Constellation Brands filed the most recent lawsuit on Thursday, April 18, against Major Brands, also stating the agreement between the companies was not protected by the state’s franchise law.
Constellation, a wine company, represents a quarter of Major Brands’ wine business, one percent of its spirit business, and seven percent of its total revenues, according to McCollum.
Because of the previously mentioned terminations, McCullom said 56 percent of Major Brands’ spirits business and 42 percent of the company’s overall business is at risk.
“How it works is this: if 40 percent of the bottles we put on the truck [would be gone], do we need as many trucks? Do we need as many people?” McCullom said. “That’s the concern.”
Glazer’s, Missouri’s other large distributor, was unavailable at point of contact to comment about the company’s losses from terminated agreements as well as contracts potentially gained from those that left Major Brands.
The legislation
Currently there are two pieces of legislation that seek to accomplish similar goals of last year’s SB837: House Bill 759 and Senate Bill 365.
A House Committee Substitute for HB759, sponsored by Rep. Caleb Jones, R-California, was voted do pass from the General Laws Committee last week. Jones, who chairs the committee, said the bill has not yet left his committee, however.
The Senate Committee Substitute for SB365, sponsored by Sen. Mike Parson, R-Bolivar, was voted do pass from the Commerce, Consumer Protection, Energy and the Environment Committee with a 6-4 vote on April 9.
Jones, HB759’s sponsor and handler of last year’s SB 837 when it was in the House, said the bill was brought in front of the Republican Caucus last Wednesday in order to help quell one of Jones’ biggest concerns: that members would not sit down and analyze the issue, but rather vote with what the last person they spoke with said.
“I wanted everyone to see both sides of the issue, unfiltered,” he said, mentioning that multiple people testified during the meeting.
The bill is still sitting in committee, Jones said, because there are still a few things to be sorted out.
“If this bill fails, it will give an opportunity for larger distributors to come in and take over a lot of these franchise agreements that are deemed null and void for not passing this bill,” Jones added.
Jones pointed out that Glazer’s, which adamantly opposes this legislation and testified against it during the caucus meeting, was an advocate last year.
Parson was unable to be reached for comment.
Proponents of the legislation
Major Brands’ CEO Sue McCullom said for her, the urgency on this legislation is to get rid of the “volatility and chaos” in order to get back to “a very stable place with competitive pricing, maximum choice, and good regulatory structure for liquor.” She emphasized her thought that Missouri’s franchise law had operated throughout the last 40 years with the industry showing growth and rarely, if any, litigation.
One of the bigger pushes from McCullom and Major Brands’ side is the idea that the entire situation is about Missouri interests versus out-of-state interests, as many of the companies who have terminated agreements with Major Brands and Glazer’s are both from out-of-state, with the exception of Luxco.
“It’s unprecedented in the industry,” she said. “It’s the liquor wars. They saw they could come in and control the Missouri market, and they took the opportunity.”
During testimony to the caucus, McCullom said she was asked whether the rumors of her intent to sell Major Brands were true.
“Of course I’m not,” McCollum told The Missouri Times. “I’d have to let down my family and the 700 people whose family depends on Major Brands. My company is not for sale. I will come down here every day to dispel that rumor. There’s only one person who can decide if this company is for sale, and that’s me. The reason the opposition keeps saying that is because they want to throw up a smoke screen.”
Jones said he thinks one of Nixon’s concerns from last year involving the effects of the legislation on Missouri wineries has been addressed with a carve out for smaller wineries. He said he has not communicated with the governor’s office about Nixon’s temperature on the legislation, but noted that winery groups statewide are on board.
Peter Hofherr, chief executive officer of St. James Winery and chairman of the Missouri Wine and Grape Board, said the wine industry across the state thinks the carve out gives them a chance to develop their brand. He added that his company would not be involved in the carve-out because his company, and about four others of Missouri’s 120 wineries, is too big.
“[Passing this bill] increases competition because large companies like Diageo have gotten so large and powerful that they’re controlling the three-tier system and controlling who gets shelf space,” he said. “The franchise law creates a buffer between wholesaler and multinational suppliers and creates an environment where the middle-tier is healthy and can invest in local brands that don’t have more pocket power.”
Jones said he thinks if this legislation does not pass during this session, the market could be upside down and in flux.
“I think the distribution of alcohol will dramatically change,” Jones said. “I can’t say what the effect would be on prices, though. But, it’s very possible one large distributor could take over the entire state.”
Opponents of the legislation
The general opposition to the legislation’s argument currently includes two major points: that the issue at stake is not Missouri versus out-of-state, and instead that the true issue involves the franchise protection legislation locking in suppliers, which was included in Nixon’s veto letter last July.
One of the key groups opposing the legislation is the Distilled Spirits Council of the United States, which, according to its website, is a trade association for American distillers, representing about 70 percent of the country’s distilled spirits brands.
Dale Szyndrowski, vice president of the council’s Central Region Office of Government Relations, said they are adamantly opposed to the legislation, for several reasons, which is why his organization has added resources to get their word out to lawmakers.
“Almost the same bill was vetoed last year by the governor, and now it’s being brought forward by basically one wholesaler,” Szyndrowski said. “Major Brands is trying to lock-in our suppliers on perpetuity.”
He said the council and its representatives are making a point of discussing with legislators that these bills are not about protecting Missouri jobs, as those jobs will be there no matter what, he said.
“The 21st Amendment requires the producers and marketers — the people I represent — to sell to in-state Missouri wholesalers,” Szyndrowski said. “So whether it’s Major Brands or Glazer’s, those jobs are going to stay in Missouri.”
Shea said Pernod Ricard USA also opposes the legislation because, in their belief, it is unnecessary and undesirable.
“Our position on this bill is because we have the interest of Missouri consumers in mind,” he said. “The interest of Missouri consumers would be to have distributors working at their highest level. We definitely have local interests in mind.”
Even though there is still litigation between Pernod Ricard and Major Brands, Shea said Pernod is “looking forward to an expanded relationship with [Major Brands]” looking ahead, as they announced last week they would be adopting Major Brands as their sole Missouri distributor.
To counter the argument of the bill’s proponents about the issue being a matter of in-state versus out-of-state interest, Lux said Luxco does not support any franchise legislation that creates a monopoly for distributors. Lux said his company operates in all states, and 12 of them have some form of a franchise law.
“We have to play the hand we’re dealt,” he said. “In most states [that have franchise laws], we’re less efficient.”
He added that some states have locked-in-for-life policies, like Georgia, where if a supplier breaks an agreement with a distributor, they’re locked out of making agreements with any other distributor.
“It’s just not good for business,” he said. “We’ll have to operate under the new laws if the bill passes because we have no choice. It’s anti-competitive and would make it more challenging to go about our business.”
Szyndrowski said he is optimistic that some leadership and legislators see the bills as unnecessary. He said he thinks it’s “a sad day” when legislators’ calendars are filled with “special interests, taking away from the work they should be doing.”
Looking ahead
Currently, neither bill has been placed on the legislative calendar, but representatives from both sides have said they will continue to maintain their presence in the Capitol to talk with legislators about the issue.
Source: Missouri Times