Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Successor beer manufacturer lawfully terminates distributor without cause, (Dec 12, 2014)

By Greg Hammond, J.D.

A company that purchased a beer manufacturer could lawfully terminate its distribution contracts without cause, the federal district court in Columbus, Ohio has decided. The purchasing company was deemed a “successor manufacturer” under the Ohio Alcoholic Beverages Franchise Act (OABFA) and was therefore entitled to summary judgment (Tri County Wholesale Distributors, Inc. v. Labatt USA Operating Co., LLC, December 11, 2014, Marbley, A.).

Background. Labatt USA Operating Co., LLC supplies alcoholic beverages to distributors in Ohio, and is a “manufacturer” of beer and flavored malt beverages, as defined in the OABFA. Labatt entered into written distribution agreements with Tri County Wholesale Distributors, Inc. and the Bellas Co., doing business as Iron City Distributing (Iron City). However, Labatt was subsequently purchased by Cerveceria Costa Rica, S.A. (CCR), which—shortly thereafter—terminated the two distribution agreements. Tri County and Iron City filed suit against Labatt and CCR, seeking declaratory judgment that (1) the defendants are prohibited from terminating their existing distribution franchises with Labatt, pursuant to the OABFA; or (2) that the OABFA so-applied would constitute an unconstitutional taking. The defendants moved for summary judgment.

Successor manufacturer. In Esber Beverage Co. v. Labatt USA Operating Co., the Ohio Supreme Court determined that the OABFA allows a “successor manufacturer” to terminate, without cause, a written franchise agreement it assumed in its purchase of another manufacturer, brand, or product. However, Tri County and Iron City argued that CCR is not a “successor manufacturer” under the OABFA. The court noted that the OABFA does not define “successor manufacturer,” and was therefore required to determine the Ohio legislature’s intent.

The court determined that a plain reading of the OABFA shows that “upon a complete acquisition of a manufacturer, brand, or product, the new owner has a ‘window of time’ in which to terminate franchise agreements, written or not, that the distributors had with the prior manufacturer or supplier.” Legislative history supports this position, the court found, as the evolution of the statute and the language allowing for termination without just cause, lends itself to the interpretation that the OABFA creates an exception to the “just cause” requirement, so long as the successor repurchases inventory and compensates the distributor for diminished value of its business.

The court consequently held that a “successor manufacturer,” under the OABFA, is “an entity which acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition or acquires or is the assignee of a particular product or brand of alcoholic beverage from another manufacturer, and which, as a result of that acquisition of a manufacturer, product, or brand, is tasked with making business decisions on how to operate most efficiently in its newly acquired business of supplying or manufacturing alcoholic beverages.”

Considering the facts of the instant case, the court determined that CCR is a “successor manufacturer” under the OABFA. Specifically, it found: (1) CCR is a “successor” within the meaning of “successor manufacturer,” because there was a complete transfer of ownership of the brand to CCR; and (2) CCR is a “manufacturer” within the meaning of “successor manufacturer,” because there is uncontroverted testimony that CCR owns Labatt and is faced with the ultimate business making decisions concerning how Labatt should operate. The defendants’ motion for summary judgment was therefore granted. However, the court will hold a hearing at a later date to determine the compensation due to Tri County and Iron City.

The case number is 2:13-CV-317.

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 Company, LLC, Cerveceria Costa Rica, SA, and North American Breweries Holdings, LLC.

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

Cases: FranchisingDistribution OhioNews