20A brewery should treat its potential relationship with a distributor or wholesaler just as any person should treat any person they are considering as a future spouse, by doing the research and investigation before entering into any distribution agreement or authorizing, in any way, the distributor/wholesaler to sell or distribute any of the brewery’s beer.
A holder of a brewery permit, assuming it sells fewer than 25,000 barrels of beer each year, may self-distribute its beer (N.C.G.S. § 18B-1104(8)). However, once a brewery has entered into a distribution agreement it is difficult, even for a small brewery (i.e., a brewery selling fewer than 25,000 barrels each year), for that brewery to recover its distribution rights. Some might even say that a brewery’s divorce from a distributor is even more difficult to obtain than a traditional real divorce among spouses! Why is this so? North Carolina law is favorable to the distributor in this area and help to protect distributor rights in a number of ways.
First, what is a franchise agreement? “A franchise agreement is a commercial relationship between a wholesaler and supplier of a definite or indefinite duration, whether written or oral.” N.C.G.S. § 18B-1302(a). This includes both the right to offer and sell beer, and also to agreements where the wholesaler is granted the license to use a trade name, trademark, service mark or related symbol of the supplier. Distribution agreements must be filed with the Alcoholic Beverage Commission and cannot discriminate in price between wholesalers licensed in North Carolina (§ 18B-1304(10)). This means that suppliers must offer uniform pricing, terms, and service to all wholesalers within the State of North Carolina.
Once a brewery has entered into a distribution agreement with a wholesaler (or multiple wholesalers for different territories), how can it terminate the agreement (if, say, it wanted to use a different wholesaler)? The simple answer… it can’t… at least, not easily and without significant cost. In order to terminate a franchise (distribution) agreement, the supplier (i.e., the brewery) must show good cause for termination. Good cause “exists when the wholesaler fails to comply with provisions of the agreement which are reasonable, material, not unconscionable, and which are not discriminatory when compared with the provisions imposed… on other similarly situated wholesaler by the supplier.” § 18B-1305(a).
There is one big exception to the above paragraph: small breweries. A small brewery (again, a brewery selling under 25,000 barrels per year) may re-claim its distribution rights (regardless of whether good cause exists) by giving written notice to the wholesaler and by paying “fair market value” to the wholesaler for the distribution rights. Let me tell you now: fair market value is not cheap. It’s expensive.
So what can a brewery do? It cannot contract around these requirements (even if a distribution agreement does not explicitly state the above matters, all portions of the NC Beer Franchise Law are automatically implied into all distribution agreements). It cannot get out of such distribution agreements, once entered, easily or cheaply. All a brewery can do is full due diligence up front in both deciding whether to use a distributor/wholesaler and in selecting a distributor/wholesaler.
Next blog: Distribution Agreement Terms and Issues
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