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Thursday, April 18, 2013

Diageo Americas v. Major Brands: Franchise Law Litigation and Forum Selection


Wineries big and small face difficulties in trying to terminate distribution ageements in franchise law states.  We posted an article a few weeks ago about a lawsuit filed by Diageo Americas, Inc. against its Missouri distributor, Major Brands, Inc.  Diageo has asked the federal district court in Connecticut to issue a declaratory judgment allowing the company to terminate its Missouri  distribution agreement.  The court will first have to determine which state (Connecticut or Missouri) is the proper forum to hear the parties' dispute. 

Diageo filed its complaint in federal district court in Connecticut pursuant to a "forum selection" clause in the agreements stating that jurisdiction and venue for any litigation between the parties would be in the State of Connecticut.  

Major Brands wants this dispute heard in Missouri state court, and has taken numerous steps to take the case out of Connecticut.  First, Major Brands filed its own lawsuit in Missouri (Cause No. 1322-CC00534) shortly after Diageo filed its complaint, claiming that Diageo's attempted termination of the parties' agreement violated Missouri franchise law.  The Missouri lawsuit also names Mid-Continent Distributors, Inc. d/b/a Glazer's Midwest as a co-defendant. 

In addition, Major Brands filed a motion to dismiss Diageo's federal court case in Connecticut earlier this month, arguing in part that the court should deem the forum selection clause unenforceable because of Missouri's strong public policy interest in liquor control and protection of a Missouri franchisee.  "Because of Missouri's complex and specific regulations regarding both liquor control and termination of Missouri franchisees, a ruling by this Court would disrupt the State's attempt to establish a coherent policy regarding these important concerns…."  It is not surprising that Major Brands is attempting to keep the dispute in state court.  Distributors in franchise states may believe that a state court provides a friendlier forum for their claims than federal court. 

The Federal District Court's ruling on Major Brand's motion will be closely watched by suppliers and distributors in franchise law states.  If the court denies the motion and concludes that the forum selection clause is enforceable, then alcohol beverage suppliers may be well served by including similar forum selection clause provisions in any agreement governing distribution in franchise states. 

For more information on distributor termination or franchise law issues, please contact John Trinidad at jtrinidad@dpf-law.com.

Friday, April 12, 2013

The NYSLA Ruling – What it Really Means to Licensees and Third Party Marketers

We have received several questions from clients regarding the New York State Liquor Authority’s ruling on April 9, 2013 regarding the “legality of internet advertising platforms.” The ruling, which addresses the relationship between a New York state wholesaler, a New York state retailer, a third party internet marketer and ShipCompliant, is narrow and specifically applies only to sales under ShipCompliant’s MarketPlace Platform conducted through New York’s three tier system. The NYSLA does however also provide some guidance as to the type of third party marketing arrangements that would be permitted, pending issuance of a more thorough advisory on the matter in the future.

It is important to note that the ruling does not address or impact shipping by out of state wineries that hold direct to consumer shipper licenses for New York or the legality of ShipCompliant’s Producer Direct program used by some wineries to assist with their direct to consumer shipments.

Summary of NYSLA Decision

Following an inquiry into the relationships and responsibility of the involved parties, the NYSLA found that the retailer and wholesaler in this case (the “licensed sellers”) exercised little to no control over the sales being made by the third party marketer/advertiser and played a “passive” role. The unlicensed third party marketer, on the other hand, exercised a “high degree of control over the business operations of the participating licensed seller”, including selecting which wines would be sold, setting the prices at which the wine would be sold, managing the storage and shipment of the wines sold and controlling the advertising for the wines sold, all with little to no oversight from the licensed sellers. According to the NYSLA, the third party marketer also received a “predominant proportion of the proceeds from the sale of alcoholic beverages,” while the licensed sellers simply received a flat fee. Based on these facts, the NYSLA held that the unlicensed third party marketer/advertiser was making sales without a license and that, therefore, the “relationship between the advertiser and the licensed seller in the MarketPlace Platform system” violates New York state regulations which “prohibit a licensee from making its license available to a person who has not been approved by the NYSLA” to hold that license.

Because of the narrow nature of this decision, the NYSLA stated that it intended to issue an advisory that will provide comprehensive guidance to the industry on the involvement of unlicensed parties in Internet sales of alcohol beverages to consumers. However, until such time, the NYSLA offered the following guidance to industry members:

* Licensees may rely on an opinion by the NYSLA Office of Counsel that provides that “a third party may allow a licensee to advertise its products on the third party’s website, provided that consumers are directed to the licensee’s website to place an order” and that the third party’s compensation is limited to a flat fee that is not contingent on the number of sales or the amount sold.

* Arrangements where licensed sellers take a passive role and/or incur no business risk are prohibited.

* Arrangements where an advertiser, third party marketer or other unlicensed party performs or is permitted to perform retail functions, such as deciding what products will be sold, what prices should be charged, how funds are controlled and distributed or the amount of the licensee’s profits are prohibited.

* Arrangements where the compensation to a third party constitutes a substantial portion of the sales or sales made are prohibited.

Notably, the NYSLA made clear that in evaluating the legality of these types of arrangements, it would not only look at the written agreements between the parties, but would also “evaluat4e the actual, practical, day-to-day functioning of the arrangements”, as it did in this case.

Comparison to California ABC Third Party Provider Advisory

On November 1, 2011, the California Department of Alcoholic Beverage Control issued an advisory on Third Party Providers, in which it stated that unlicensed third party marketers can facilitate the sale of wine over the Internet, provided that the benefited alcoholic beverage licensee at all times retains control over all sales transactions, including all decisions regarding pricing, selection, shipping and fulfillment. Under the California Advisory, a third party marketer would therefore be permitted to place advertising for an alcoholic beverage at the direction of a licensee, make buying recommendations to a consumer, direct consumers to specific licensees, receive orders and pass them on to the licensee for acceptance and fulfillment, process payments (although the licensee ultimately must control the funds and the flow of funds) and assist with shipping arrangements. But again, the licensee must at all times retain control over pricing, selection and fulfillment. The third party marketers may be compensated for their services, so long as the compensation is reasonable and does not result in any “actual or de facto control” over the licensee by the third party marketer.

The CA Advisory and the NYSLA ruling are consistent to the extent that both require that control for alcoholic beverage sales be held by a licensed seller. However, there are notable differences between the approaches taken by these two agencies and it is unclear whether the NYSLA’s ultimate stance on these issues will be in line with the CA ABC. For instance, the NYSLA suggested that, pending the NYSLA’s definitive statement on these issues, licensees should rely on an opinion by the NYSLA Office of Counsel that provides that “a third party may allow a licensee to advertise its products on the third party’s website, provided that consumers are directed to the licensee’s website to place an order” and that the third party’s compensation is limited to a flat fee that is not contingent on the number of sales or the amount sold. These requirements are not included in the CA ABC Advisory and in fact sales made on third party marketers’ sites (rather than on the licensee’s site) and reasonable fee arrangements (other than solely flat fees) would be permissible under California’s regulations so long as they comply with the remaining portions of the CA ABC Advisory and California alcoholic beverage rules and regulations.

A final decision on the permissibility of sales of alcoholic beverages using third party marketers will be forthcoming from the NYSLA and NYSLA intends to hold public hearings on the matter, allowing interested parties the opportunity to present their positions. In the meantime, license holders, third party marketers and other entities participating in third party marketing-type sales in New York should operate in accordance with the guidelines set forth by the NYSLA in the ruling.

In the end, licensees, third party marketers and other parties involved with these transactions should keep in mind that the sales of alcoholic beverages using third party marketers remains a grey area and should keep close eye on how these issues develop throughout the country.

For more information or assistance with third party marketing issues, please contact Bahaneh Hobel at bhobel@dpf-law.com

Sunday, April 7, 2013

Franchise Laws and Diageo's Recent Distributor Termination Action in Missouri



Ohio, New Jersey, North Carolina, Virginia, and a number of other states restrict a winery’s ability to terminate distributors in that state through “franchise laws.” The Virginia Wine Franchise Act, for example, prevents a winery from unilaterally amending, cancelling, terminating or refusing to renew any Virginia distribution agreement absent good cause, and good cause is very narrowly defined.  A winery wishing to end its distributor agreement in violation of franchise laws may face stiff penalties.  In North Carolina, violation of state franchise laws may lead to the suspension of sale of the alcohol beverage supplier’s products in that state or revocation of a winery’s permit. 

In Missouri, Missouri Revised Statutes Sec. 407.413, an alcohol beverage supplier is prohibited from “unilaterally terminat[ing] or refus[ing] to continue or change substantially the condition of any franchise with the wholesaler unless the supplier has first established good cause for such termination, non continuance or change.”  Good cause is limited to failure by the wholesaler to comply with the provisions of the supplier-wholesaler agreement, bad faith or failure to observe reasonable commercial standards of fair dealing, or revocation or suspension of the wholesaler’s federal permit or state/local licenses.

We usually see this alleged “breach  of franchise agreement” used as the basis for a counter-claim by the purchaser of our client’s wine. Typically, XYZ Winery sells its wine to a retail establishment in a franchise state, which then doesn’t pay for the wine. When our client sues the purchaser in California state court, the purchaser counter sues  for breach of the alleged franchise agreement, and will sometimes remove the case to federal court. The purchaser will then use the cost of litigation of its counter-claim to negotiate a discount on the amount owed, or a complete “walk-away” settlement.

In a recent Missouri case, however, Diageo sued its distributor in the state to terminate its distribution agreement. Diageo argues that Missouri state law should not apply to the two distribution contracts in question.  Diageo relies on language in its distribution contract with Major Brands that states that the contract's terms are to be governed by Connecticut law for certain products, and New York law for certain other products.  In the alternative, Diageo argues that it has good cause to terminate the agreement should Missouri law apply, claiming that Major Brands failed to devote sufficient resources to the promotion of Diageo’s products, among other things.

We will be watching this case and will report on its outcome.

For more information or assistance on distributor termination issues contact David Balter (dbalter@dpf-law.com) or John Trinidad (jtrinidad@dpf-law.com).