Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Preliminary injunction blocking termination of beer distributorships dissolved, (Aug 18, 2014)

By Edward L. Puzzo, J.D.

A preliminary injunction, previously won by beer distributors challenging the termination of their franchises, must now be dissolved due to a reduced likelihood of success on the merits, based on an intervening ruling by the Ohio Supreme Court permitting terminations by successor manufacturers without cause upon due notice, the federal district court in Columbus, Ohio has ruled (Tri County Wholesale Distributors, Inc. v. Labatt USA Operating Co., LLC, August 14, 2014, Marbley, A.).

Tri County Wholesale Distributors and the Bellas Company (d/b/a Iron City Distributing) were Ohio distributors of alcoholic beverages that had franchise relationships with Labatt USA Operating, based on written distribution agreements entered into in 2010 and 2011. Labatt USA was indirectly owned by North American Breweries Holdings, which underwent a change in ownership in December 2012. In March 2013, Tri-County and Bellas received notifications from Labatt USA that their distribution agreements were being terminated under the successor manufacturer provision of the Ohio Alcoholic Beverage Franchise Act (Ohio Rev. Code §1333.85(D)). That provision permitted a successor manufacturer to terminate a distributor’s franchise without just cause by giving the distributor notice of termination within 90 days of the acquisition of the particular product or brand.

The distributors challenged the termination, requesting a declaratory judgment that Labatt be prevented from terminating their distribution franchises under the Ohio Alcoholic Beverage Franchise Act or that Labatt’s action be considered an unconstitutional taking. The distributors moved for a preliminary injunction barring termination, which was granted by the district court.

Days after the preliminary injunction was granted in this case, the Ohio Supreme Court issued its decision in Esber Distributing v. Labatt USA Operating Co. Subsequently, Labatt USA moved to vacate the preliminary injunction in this case. Labatt argued that the Esber case permitted a successor manufacturer to terminate a written franchise agreement without cause under Ohio Rev. Code §1333.85(D). After Esber, Labatt argued, Tri-County and Bellas no longer had a likelihood of success on the merits, so the preliminary injunction barring termination should be dissolved.

Preliminary injunction factors. A preliminary injunction, the court explained, is used to preserve the status quo between the parties pending trial on the merits. Four factors must be balanced in making this determination: (1) whether the movant has shown a strong likelihood of success on the merits; (2) whether the movant will suffer irreparable harm if the injunction is not issued; (3) whether the issuance of the injunction would cause substantial harm to others; and (4) whether the public interest would be served by issuing the injunction. At issue here were the first and fourth factors, the court stated.

Likelihood of success on the merits. The Esber court established that the Ohio Alcoholic Beverage Franchise Act “clearly permits” a successor manufacturer to terminate a written franchise agreement without cause, the court declared, provided that the successor manufacturer gives written notice of the termination to the distributor within 90 days of the sale, merger or acquisition, and the distributor is compensated for the lost value of the franchise. The plaintiffs Tri-County and Bellas argued that the transaction and distribution agreement at issue in Esber were materially different from those involved in this case, and that Esber did not apply here because that court did not address the Takings Clause issue they raised.

The court did not agree. Nothing in the Esber opinion indicated that its ruling only applied to certain less remote transactions, or that it would not apply to cases that raised different but related issues such as the Takings Clause argument, the court stated. The court was aware of the pending Esber litigation when it issued its injunction. Now that Esber has been issued, plaintiffs’ claims have been clarified: they no longer have a likelihood of success on the merits. Thus, vacating the preliminary injunction was proper.

Public interest served. A court may modify a final judgment when it finds that it is no longer equitable that the judgment should have prospective application, the court stated. When the preliminary injunction was imposed, it served the public interest by waiting for the Ohio Supreme Court to determine whether franchise terminations without cause by successor manufacturers were permitted under Ohio law. Now that it has been clearly established that such terminations, with the requisite compensation, are permissible, the public interest in maintaining the injunction, cannot outweigh the above-discussed factor supporting the dissolution of the preliminary injunction.

The case is Civil Action No. 2:13-cv-00317-ALM-EPD.

Attorneys: Christopher Haas (Squire Patton Boggs LLP) for Tri County Wholesale Distributors, Inc., and The Bellas Co. James B. Niehaus (Frantz Ward LLP) for Labatt USA Operating Co., LLC, Cerveceria Costa Rica, SA, and North American Breweries Holdings, LLC.

Companies: Tri County Wholesale Distributors, Inc.; The Bellas Co.; Labatt USA Operating Co., LLC; Cerveceria Costa Rica, SA; North American Breweries Holdings, LLC

Cases: FranchisingDistribution OhioNews