Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ohio App. Ct.: Successor manufacturer Heineken did not violate Ohio alcoholic beverage law with termination, (Jan 30, 2014)

By Peter Reap, J.D., LL.M.

Heineken USA, Inc. (“HUSA”) was a successor manufacturer/supplier under the meaning of the Ohio Alcoholic Beverages Franchise Act (“OABFA”) who was entitled to give notice of its intention to terminate Esber Beverage Company’s right to distribute Strongbow Hard Cider for Heineken within 90 days of HUSA’s purchase of the right to supply Strongbow brands in the U.S. from Vermont Hard Cider Company, LCC (“VHCC”), an Ohio appellate court has determined (Heineken USA, Inc. v. Esber Beverage Co., January 27, 2014, Gwin, W.). Therefore, an Ohio trial court’s grant of summary judgment in Esber’s favor was reversed and HUSA’s sole assignment of error was sustained.

Background. Esber is an Ohio distributor of alcoholic beverages to retail permit holders in the state. Heineken N.V. is a beverage manufacturer based in the Netherlands. HUSA is a wholly owned subsidiary of Heineken Brouwerijen B.V. (“Heineken B.V.”), which, in turn, is a wholly owned subsidiary of Heineken N.V.

Pursuant to a multi-billion dollar acquisition, in April 2008, Heineken N.V. acquired certain Scottish & Newcastle UK Ltd. (“S&N UK”) businesses. As a result, Heineken N.V. assumed exclusive control over and liability for S&N UK, its subsidiaries and its assets, including a brand of hard cider named Strongbow Hard Cider, effective April 28, 2008.

Prior to January 1, 2013, Heineken N.V. supplied Strongbow in the United States through its import agent Vermont Hard Cider Company, LLC (“VHCC”). Heineken B.V. entered into an agreement with VHCC effective December 31, 2012, pursuant to which Heineken B.V. compensated VHCC in exchange for the early termination of VHCC’s right to supply Strongbow in the United States. Thereafter, Heineken B.V. entered into an agreement with HUSA, “nam[ing]” the latter as the exclusive US import agent for the Brand effective January 1, 2013.

By letter dated October 30, 2012, Heineken B.V. and HUSA informed Esber it was terminating Esber’s “franchise and the associated distribution rights” with respect to Strongbow pursuant to R.C. 1333.85(D). On March 29, 2013, HUSA filed a Complaint in the Stark County Court of Common Pleas pursuant to R.C. 1333.851(B). The Complaint sought a determination within 90 days by the court of the diminished value to Esber’s business due to the loss of the Strongbow brand. Esber filed an answer and subsequently a motion for summary judgment.

The trial court granted Esber’s motion for summary judgment, finding that the franchise termination rules of the OABFA’s R.C. 1333.85(D) only apply to a “successor manufacturer” and HUSA was not a successor manufacturer. HUSA appealed.

Analysis. R.C. 1333.85(D) provides that if a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer, the successor manufacturer may give written notice of termination, nonrenewal, or renewal of the franchise to a distributor of the acquired product or brand, the court noted. Any notice of termination or nonrenewal of the franchise to a distributor of the acquired product or brand shall be received at the distributor’s principal place of business within 90 days of the date of the acquisition.

On termination of a franchise, the successor manufacturer must repurchase the distributor’s inventory and must compensate the distributor for the diminished value of the distributor’s business that is directly related to the sale of the product terminated by the successor manufacturer, including the appraised market value of the distributor’s assets devoted to the sale of the terminated product and the goodwill associated with that product.

HUSA argued that it was a “successor manufacturer” as defined in R.C. 1333.82(B) and was therefore entitled to terminate Esber’s franchise agreement pursuant to R.C. 1333.85(D). The appellate court agreed.

Heineken N.V. acquired the Strongbow brand effective April 28, 2008. Since that time, Heineken N.V. has, through its subsidiaries manufactured, marketed, and sold Strongbow in international markets. Beginning in 2008, Strongbow was imported into the United States by VHCC. Neither at the time of Heineken N.V.’s acquisition of S&N UK, nor at any time thereafter, did Heineken N.V. or S&N UK ever hold a direct or indirect ownership interest in VHCC. Similarly, Heineken N.V. never had a contractual relationship with VHCC.

The relationship was governed by contract between VHCC and Heineken N.V.’s wholly owned subsidiary, Heineken B.V. VHCC, in turn, supplied Strongbow pursuant to contracts it entered into with distributors such as Esber. On August 3, 2012, Heineken B.V. and VHCC entered into a negotiated agreement for an early termination of VHCC’s rights to import the Strongbow brand, effective December 31, 2012. At that point, Heineken B.V. did not have an entity to import or supply Strongbow to distributors in the U.S. Heineken B.V. named HUSA as the sole supplier of Strongbow, beginning in January 2013.

There was no evidence that VHCC is an Ohio corporation, the court observed. Nor was there any evidence submitted in the trial court that VHCC is located in the State of Ohio. Thus, the OABFA did not govern the relationship between VHCC and Heineken, N.V. or Heineken B.V., the court explained.

Here, VHCC agreed to an early termination of its relationship with Heineken in exchange for valuable consideration. The question in this case was whether Heineken N.V. or Heineken B.V. was required to honor the contracts that VHCC entered into with distributors of Strongbow to retail permit holders in Ohio such as Esber. They do not as long as the procedure set forth in R.C. 1333.85(D) is followed, the court decided.

Whether Heineken N.V., Heineken B.V. or HUSA owns the Strongbow brand was not germane to the issue in this case, according to the court. Nor did it matter that Heineken B.V. and HUSA are owned by Heineken N.V. VHCC was an independent third party not owned, operated or controlled by Heineken N.V., Heineken B.V. or HUSA. The trial court misconstrued the appellate court’s decision in Esber I, according to the court. Esber Beverage Co. v. Heineken USA, Inc., 5th Dist. Stark No. 2011 CA00033, 2011-Ohio-5939. [“Esber I”].

In Esber I, Esber brought a declaratory judgment action alleging that the termination of its franchise for foreign beer brand was unlawful, and seeking to enjoin the United States distributor from terminating Esber’s franchise. Esber I was a 90-day notice case based upon the same April 28, 2008 transaction by which Heineken N.V. acquired Strongbow, but specifically involved Heineken N.V.’s acquisition of the Newcastle Brown Ale brand and the related entities. Ultimately, the appellate court held that the Act did not authorize the termination of Esber’s franchise.

Unlike Esber I, there was no allegation in the case at bar, that the time requirements set forth in R.C. 1333.85(D) were not properly followed. Further, in this case, Heineken B.V. bought the right to supply the Strongbow brand to distributors from VHCC, an entity over which Heineken N.V., Heineken B.V. and HUSA did not own or exercise control, for valuable consideration.

In Esber Beverage Co. v. LaBatt USA Operating Co., the Ohio Supreme Court recently held “that R.C. 1333.85(D) is clear and unambiguous and permits successor manufacturers to assemble their own team of distributors so long as the successor manufacturers provide timely notice and compensate those distributors who are not being retained.” HUSA was a successor manufacturer/ supplier who was entitled to give notice of its intention to terminate to Esber within 90 days of its purchase of the right to supply Strongbow brands in the U.S. from VHCC, the court held.

The case is No. 2013 CA 00158.

Attorneys: James L. Messenger (Henderson, Covington, Messenger, Newman & Thomas Co., L.P.A.) for Heineken USA, Inc. Gary Corroto (Tzangas, Plakas, Mannos & Raies, Ltd.) for Esber Beverage Co.

Companies: Heineken USA, Inc.; Esber Beverage Co.

Cases: FranchisingDistribution OhioNews