- No easy access to Christmas Ale this winter?
- November 27, 2017
Great Lakes Brewing Company is a household name across Ohio. The prevalence of the Great Lakes name and its beer is partly due to its relationships with its distributors – relationships that are governed by the Ohio Alcoholic Beverages Franchise Act (the Franchise Act). Now, due to a dispute, Great Lakes’ relationship with one of its major distributors in the Columbus area is currently in flux. This ongoing dispute and a recent Sixth Circuit opinion deal with many of the main principles of the Franchise Act that governs alcoholic beverage distributor relationships.
The Franchise Act includes two important requirements at stake in this case:
1. A party to a distribution franchise agreement may not cancel or fail to renew a franchise without “just cause” without the consent of the other party.
2. The act encourages manufacturers and distributors to enter into written franchise agreements, and renders “void and unenforceable” any provisions in these franchise agreements that do not comply with the Franchise Act.
In Great Lakes case, these provisions became especially important when Southern Glazer’s Distributors of Ohio, LLC, attempted to execute a merger without Great Lakes’ consent. The franchise agreement between the two companies provided that Great Lakes must consent to any proposed changes in ownership of Southern Glazer’s, and that Great Lakes could terminate the franchise agreement for cause – including the execution of an ownership change without its consent. Due to the structure of the proposed merger, Southern Glazer’s took the position that consent was not required, but Great Lakes disagreed. When Southern Glazers executed the merger without Great Lakes’ consent, Great Lakes sought to end the distributor relationship pursuant to the Franchise Act. Because Great Lakes beer is a major rainmaker for Southern Glazer’s, it then sought and obtained a preliminary injunction prohibiting the termination of the franchise agreement, and Great Lakes appealed to the Sixth Circuit.
In an opinion issued in June 2017, the Sixth Circuit reversed the entry of the preliminary injunction, noting that the district court erred as a matter of law by failing to focus on the difference between the language of the Franchise Act and the franchise agreement for the distribution relationship. While Southern Glazer’s took the position that there was a conflict between the Franchise Act and the franchise agreement that would render the provision requiring Great Lakes’ consent to a merger as “void and unenforceable,” the court found that there was no “meaningful inconsistency” between the language. Instead, the Sixth Circuit noted that section 1333.84(F) of the Franchise Act does not “prohibit a manufacturer from requiring consent with respect to the sale of a distributor’s business;” rather, it prohibits Great Lakes from unreasonably withholding its consent when considering whether to consent to a change in ownership. In fact, the court noted that the provision of the Franchise Act requiring consent to a merger “actually anticipates that parties will include such provisions in their written franchise agreements.” Even though the Sixth Circuit found that certain other factors weighed in favor of granting the preliminary injunction, the Sixth Circuit ultimately reversed the grant of the preliminary injunction because the district court committed an error of law “on the all-important likelihood of success [on the merits] factor, no less. . . [a] preliminary injunction issued where there is simply no likelihood of success on the merits must be reversed.”
Immediately after the preliminary injunction was overturned, however, the parties resumed briefing at the district court level. Southern Glazer’s filed a second motion for a preliminary injunction, the district court granted the preliminary injunction without a hearing, Great Lakes appealed again, and a nearly identical case is once again pending before the Sixth Circuit.
REVIEW THE LANGUAGE OF THE FRANCHISE ACT CLOSELY WHEN DRAFTING AND NEGOTIATING A FRANCHISE AGREEMENTThe case highlights the importance of reviewing the language of the Franchise Act closely when drafting and negotiating a franchise agreement pursuant to the Franchise Act – as contemplated here, the language in the agreement may eventually be deemed unenforceable if it does not appropriately comport with the Franchise Act.
It remains to be seen whether this ongoing dispute about the Franchise Act will allow Great Lakes beer lovers in Columbus, Ohio to have easy access to their favorite Christmas Ale this winter.