Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ohio App.: Successor craft beer maker entitled to terminate supplier’s distribution franchise, (Jan 20, 2016)

By Linda O’Brien, J.D., LL.M.

Following the purchase of the assets of a craft beer production brewery, the acquiring manufacturer was entitled to terminate the exclusive distribution franchise of a beverage supply company, the Ohio Court of Appeals in Columbus has ruled. Thus, the trial court’s grant of summary judgment in favor of the supply company was reversed (Premium Beverage Supply, Ltd. v. TBK Production Works, Inc., January 19, 2016, Klatt, W.).

In 1995, J. Christopher McKim opened a brew-on premise microbrewery in Strongsville, Ohio. The business was expanded to include a restaurant, winery, and production brewery. The production brewery, which was owned and operated by TBK Production Works, manufactured craft beers. In 2008, TBK and Premium Beverage Supply entered into an agreement whereby Premium was appointed the sole distributor of TBK’s craft beers in Ohio.

In January 2013, TBK agreed to sell its assets to Brew Kettle Production Works. After the purchase, Brew Kettle began the process to obtain a liquor license to operate the production brewery. In May 2013, Brew Kettle notified Premium that it was terminating the sales and distribution agreement between TBK and Premium. Premium filed suit, alleging breach of contract and seeking injunctive relief. The trial court determined that Brew Kettle could not terminate Premium’s franchise and granted its motion for summary judgment. Brew Kettle appealed and, after receiving its liquor permit, issued a second termination notice to Premium.

Under the Ohio Alcoholic Beverage Franchise Act, a manufacturer cannot cancel or fail to renew a distribution franchise without prior consent unless just cause exists or 60 days’ prior notice is provided. An exception to the general rule requiring just cause to terminate a franchise is if a successor manufacturer acquires all the assets of another manufacturer through merger or acquisition, the successor manufacturer may give written notice of termination of the franchise within 90 days of the date of the merger or acquisition.

The appellate court determined that the trial court erred in finding that Brew Kettle could not terminate the distribution agreement because it was not a party to the agreement and the agreement did not include a provision for its termination if a successor manufacturer acquired the assets of TBK. The Ohio Supreme Court held in Esber Beverage Co. v. Labatt USA Operating Co., L.L.C., 138 Ohio St. 3d 71 (2013) that the existence of a written franchise agreement did not bar a successor manufacturer from relying on the Ohio statute to terminate the franchise. In light of this holding, the appellate court noted that Brew Kettle’s non-party status and lack of compliance with the terms of the distribution agreement did not preclude Brew Kettle from terminating Premium’s franchise.

Furthermore, the trial court erred in finding that Brew Kettle did not qualify as a “successor manufacturer.” According to the appellate court, it was undisputed that Brew Kettle was making alcoholic beverages under an interim management agreement while it applied for the necessary liquor permit. Thus, Brew Kettle qualified as a manufacturer when it notified Premium of the termination of the franchise agreement.

The appellate court rejected Premium’s contention that the asset purchase transaction fell within the statute’s exception that the restructuring of a manufacturer’s business was not just cause to terminate a franchise, since McKim exercised control over both TBK and Brew Kettle. The appellate court noted that, although McKim undisputedly had control of TBK, he had only a minority interest in Brew Kettle and was not responsible of its daily operations. There was no evidence that the asset purchase was merely a “paper” transaction as it was entered into after arm’s-length negotiations, which culminated in Brew Kettle’s payment of consideration for all of TBK’s assets.

Finally, Brew Kettle presented evidence that it acquired substantially all of the TBK’s assets in February 2013 and gave Premium written notice that it was terminating Premium’s distribution franchise in May 2013—within 90 days of Brew Kettle’s acquisition of TBK’s assets. Therefore, Brew Kettle legally cancelled Premium’s franchise in May 2013. Accordingly, the trial court’s judgment was reversed and the matter remanded for the grant of summary judgment in favor of the defendants, the appellate court concluded.

The case is No. 15AP-495.

Attorneys: Roger L. Schantz and Steven A. Oldham (Benesch Friedlander Coplan & Aronoff LLP) for Premium Beverage Supply, Ltd. James L. Messenger, Richard J. Thomas, and Jerry R. Krzys (Henderson, Covington, Messenger, Newman & Thomas Co., L.P.A.) for TBK Production Works, Inc. and Brew Kettle Production Works, LLC.

Companies: Premium Beverage Supply, Ltd.; TBK Production Works, Inc.; Brew Kettle Production Works, LLC

Cases: FranchisingDistribution OhioNews