• California Bolsters Distributor Protections in New Beer Franchise Law
  • October 18, 2007 | Author: Susan C. Cagann
  • Law Firm: Farella Braun + Martel LLP - San Francisco Office
  • This week, Governor Schwarzenegger signed new legislation expanding the rights of beer wholesalers in the event of a supplier's change in control, sale of a brand or other transition.  Under Senate Bill 574, section 25000.2 is added to the Business and Professions Code; this statute compels a successor beer manufacturer to compensate a beer wholesaler if the distribution relationship is terminated. 

    The new law requires the successor manufacturer to pay fair market value for the terminated "distribution right".  The value is to be negotiated by the parties.  If the parties cannot reach agreement on the fair market value of the distribution right, mandatory arbitration is required.  A dissatisfied party may appeal the arbitration award to the superior court.  Until an agreement is reached or a result is compelled by an arbitrator or court, the successor supplier is required to continue the relationship with the beer wholesaler.

    A Case to Watch:  Wine Distribution

    Litigants are wrapping up a trial in a case challenging well settled California law that permits wine suppliers to terminate wholesalers without compensating the wholesaler for the value of the departing brand or brands.  Unlike beer distribution relationships, there is no statute in California that creates franchise protection for wine distributors.  Since 1995, California courts have recognized that an oral distribution agreement for wine is terminable at will upon reasonable notice.  Varni Bros. Corp. v.  Wine World, Inc. (1995) 35 Cal.App.4th 880.  Trial is underway in San Joaquin Superior Court in the matter of Phillips Farms v. Frank-Lin Distillers Products Ltd. Case No: CV029401 where among other issues, the distributor-Frank-Lin-- is asserting that the relationship cannot be terminated without the winery paying a significant termination fee.

    In the Varni case, there was no written distribution agreement.  The Court found that the parties' conduct evidenced a distribution agreement. The Court allowed evidence of trade customs to supply terms of the implied contract so long as they were consistent with the parties' conduct.  As there was no agreement as to the duration of the distribution relationship, the Court held that the contract was of indefinite duration, terminable at the will by either party.  In reaching this conclusion, the Court was persuaded by evidence of industry custom that wine distribution arrangements were terminable for any reason and not just for good cause.  The Court held that Wine World was free to terminate the implied contract with Varni. 

    In the current litigation as in the Varni case, Phillips Farms had no written distribution contract with Frank-Lin.  The relationship began in 2002.  The winery provided reasonable notice of termination to the distributor.  Frank-Lin asserts the relationship cannot be terminated absent good cause.  And, the distributor is demanding a hefty penalty for termination. 

    Closing arguments in the case could begin before this week ends.  The decision in this case could alter long standing practices in wine distribution relationships.  If the distributor is successful, many wineries should reevaluate whether to require written contracts with their distributors or if they already have written agreements, to assess the terms in light of a distributor victory.