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06.29.2012 Significant Amendments to the North Carolina Beer Franchise Law
06.29.2012

 

North Carolina Senate Bill 745 contains significant amendments to the North Carolina Beer Franchise Law, G.S. 18B-1300 et seq. (“Beer Franchise Law”).  Senate Bill 745 was signed into law by North Carolina Governor Beverly Perdue on June 4, 2012, and the majority of its provisions are now in effect.  A copy of Senate Bill 745 as signed by Governor Perdue is attached.

 

Beer suppliers, breweries, and wholesalers should be aware of the major changes to the Beer Franchise Law which include:  (1) a requirement that suppliers offer uniform pricing, terms, and service to wholesalers within the state of North Carolina, which will be effective October 1, 2012, (2) an exemption from good cause termination provisions for small breweries in North Carolina producing less than 25,000 barrels per year, which allows them to repurchase distribution rights for their brands, (3) a declaration of statutory law that the desire of a supplier to consolidate distribution is not good cause to terminate a wholesaler, (4) the right of a supplier to match and reassign to its designee the sale of an ownership interest in a wholesaler’s business, and (5) the ability of the North Carolina ABC Commission to require mediation for franchise disputes.  These are significant changes in the provisions of the Beer Franchise Law.  Other major changes that were included in previous versions of Senate Bill 745, including a requirement that wholesalers offer uniform pricing to retailers, and the right of wholesalers to recover costs and attorneys’ fees for unlawful termination by a supplier, were not part of the final version of the bill.  A summary of the major changes is below.

 

Codification of Definition of Brand

 

The bill strengthens the definition of “brand” as pertains to beer, by codifying the definition that currently exists in the North Carolina Administrative Code, 4 NCAC 2T.0103, within the statutes of the Beer Franchise Law.  The codification of this definition in the statutes makes the definition much more difficult to amend in the future than if the definition only existed in the regulations contained within the North Carolina Administrative Code.    

 

The Beer Franchise Law as amended provides that a franchise agreement for a brand applies to all supplier products under the same brand name.  Different categories of products manufactured under a common identifying trade name are considered to be the same brand.  For example, a distribution agreement for the “Old Faithful” brand would also include “Old Faithful Light” and other products identified principally by the “Old Faithful” name.  See G.S. 18B-1303(a) as amended and corresponding regulation 4 NCAC 2T.0103.

 

Prohibited Acts by Beer Suppliers, Including Requirement that Beer Suppliers Not Discriminate in Price, Terms, or Service Between Wholesalers

 

Senate Bill 745 expands the prohibited acts of beer suppliers in their dealings with wholesalers.  The most significant of the changes is the requirement that suppliers shall not “discriminate” in price, terms, or service between wholesalers and must therefore offer uniform pricing, terms, and service to wholesalers.  See G.S. 18B-1304(10).  While the majority of the amendments to the Beer Franchise Law are effective upon the Governor’s signature, the amendments described below become effective October 1, 2012.  Beer suppliers need to know that, as of October 1, 2012, it will be unlawful to do the following:

 

  • Make changes to distribution agreements:  It will be unlawful for a beer supplier to alter in a material way, terminate, fail to renew, or cause a wholesaler to resign from a franchise agreement except for good cause and with notice, except as authorized by G.S. 18B-1305(a1) by a small brewery.  See G.S. 18B-1304(2).  Note that this provision does not apply to small breweries in North Carolina (breweries selling fewer than 25,000 barrels per year).
  • Access wholesalers’ bank accounts without consent:  It will be unlawful for a beer supplier to withdraw money from or otherwise access a wholesaler’s bank accounts without the wholesaler’s consent.  See G.S. 18B-1304(3).  
  • Present distribution agreements not consistent with Beer Franchise Law:  It will be unlawful for a beer supplier to present a franchise agreement, amendment, or renewal to a wholesaler that attempts to waive compliance with the Beer Franchise Law.  See G.S. 18B-1304(4).  Beer suppliers need to make sure that their distribution agreements are consistent with all provisions of the Beer Franchise Law, as it is now unlawful to even present a proposed distribution agreement to a wholesaler that contains different terms.  Note that the provisions of the Beer Franchise Law are automatically a part of all franchise agreements under G.S. 18B-1308.
  • Induce or coerce wholesalers:  It will be unlawful for a supplier to induce or coerce, or attempt to induce or coerce, any wholesaler to assent to any franchise agreement, amendment, or renewal that does not comply with the Beer Franchise Law.  A wholesaler entering into a franchise agreement containing provisions in conflict with the Beer Franchise Law shall not be deemed to waive rights protected by, or in compliance with, any provision of the Beer Franchise Law Article. See G.S. 18B-1304(5).
  • Coerce wholesalers related to sale of business:  It will be unlawful for a supplier to coerce or attempt to coerce a wholesaler, or designated or anticipated successor, to sign a franchise agreement, amendment, or renewal by threatening to refuse to approve or delay approval for the sale, transfer, or merger of a wholesaler’s business.  See G.S. 18B-1304(6).  Beer suppliers should note that this provision could be used to impede a supplier from obtaining a franchise agreement with a successor wholesaler.
  • Terminate wholesalers related to contract amendments:  It will be unlawful for a supplier to terminate, cancel, or nonrenew, or attempt to terminate, cancel, or nonrenew, a franchise agreement on the basis that the wholesaler fails to agree or consent to an amendment to the franchise agreement.  See G.S. 18B-1304(7).
  • Prohibit wholesalers from distributing competing products under certain conditions:  It will be unlawful for a supplier to prohibit a wholesaler from distributing products of any other supplier, unless reasonable grounds exist for the prohibition, and the acquisition of the brands would result in the wholesaler acquiring 80% or more by volume of all malt beverage products sold in the territory being acquired at the time of acquisition.  See G.S. 18B-1304(8).  This provision was specifically drawn to allow Anheuser Busch and MillerCoors to prohibit wholesalers from carrying each other’s products.
  • Refuse to approve or terminate wholesaler brand manager:  It will be unlawful for a supplier to refuse to approve or require a wholesaler to terminate a brand manager or successor manager without good cause.  Good cause exists only if the person designated for approval fails to meet reasonable standards and qualifications.  See G.S. 18B-1304(9).
  • Discriminate in price, terms, or service between wholesalers in North Carolina:  It will be unlawful for a supplier to discriminate in price, terms, or service between wholesalers licensed in North Carolina.  See G.S. 18B-1304(10).  "Discriminate" means the granting of a more favorable price, allowance, rebate, refund, payment term, commission, discount, or service to one North Carolina wholesaler than to another North Carolina wholesaler based on the quantity of malt beverages purchased or for any other reason.  The exceptions under which a supplier can offer different prices, terms, or service include:

 

o   Freight and transportation costs;

o   Price promotions on malt beverage products for special events in a particular market not to exceed 14 days;

o   Point-of-sale advertising materials;

o   Sponsorships;

o   Consumer specialty items;

o   Consumer sweepstakes;

o   Novelties;

o   The offering of a lower price or discount in order to match that of a competing supplier on a similar category of malt beverage products in the entire State or in a particular market.

 

Amendments  to Good Cause Termination Provisions

 

Senate Bill 745 strengthens the good cause termination provisions.  One of the most significant amendments is an exemption from good cause termination provisions for small breweries in North Carolina producing less than 25,000 barrels per year, which allows them to repurchase distribution rights for their brands.  See 18B-1305(a).  Another significant amendment provides that consolidation is not good cause to terminate a wholesaler in North Carolina.  See G.S. 18B-1305(d)(7).

 

Definition of Good Cause in Beer Franchise Law Applies to All Distribution Agreements:  Senate Bill 745 clarifies that the meaning of good cause as defined in the Beer Franchise Law may not be modified or superseded in a distribution agreement.  See G.S. 18B-1305(a).

 

Termination by Small Brewery:  Senate Bill 745 provides that a small brewery in North Carolina, currently defined under G.S. 18B-1104(8) as a brewery selling less than 25,000 barrels per year, can terminate wholesalers without good cause under certain circumstances.  See G.S. 18B-1305(a1).  A small brewery’s rights to distribution of its products will revert back to the brewery following the fifth business day after confirmed receipt of written notice of such reversion by the brewery to the wholesaler.  The brewery shall pay the wholesaler fair market value for the distribution rights for the affected brands, which means the highest dollar amount at which a seller would be willing to sell and a buyer would be willing to buy at the time the self-distribution rights revert back to the brewery, after each party has been provided all information relevant to the transaction.

 

Definition of What is NOT Good Cause to Terminate a Wholesaler:  Senate Bill 745 amends the statutes to provide that good cause does NOT include: 

 

  • Sale of brand: Good cause does not include the sale or transfer of the rights to manufacture, distribute or use the trade name of the brand to a successor supplier.  See G.S. 18B-1305(d)(4).
  • Failure of wholesaler to meet certain standards:  Good cause does not include the failure of the wholesaler to meet standards of operation or performance that have been imposed or revised unilaterally by the supplier without a fair opportunity for the individual wholesaler to bargain as to the terms, unless the standards are implemented on a national basis and consistently applied to North Carolina wholesalers in a nondiscriminatory manner.  See G.S. 18B-1305(d)(5).
  • Establishment of agreement with other supplier:  Good cause does not include the establishment of a franchise agreement between a wholesaler and another supplier; or similar acquisition by a wholesaler of the right to distribute a brand of another supplier.  See G.S. 18B-1305(d)(6).
  • Consolidation: Good cause does not include the desire of a supplier to consolidate its franchises.  See G.S. 18B-1305(d)(7).

 

Approval of Wholesaler Mergers and Right of Supplier to Match and Reassign Right to Purchase Ownership Interest in Wholesaler’s Business to Designee

 

Senate Bill 745 permits a wholesaler to merge with another wholesaler, transferring the existing franchise rights, under certain conditions.  See G.S. 18B-1307.  The most significant revision to this section is that if a wholesaler finds a buyer, the supplier can match and re-assign to its own designee the right to purchase the ownership interest in the wholesaler’s business. 

 

Upon notice to a supplier, a supplier may object only if the proposed transferee is not qualified.  The factors to be considered on whether a proposed transferee or merged wholesaler is a qualified person include: 

 

  • The financial capacity of the proposed transferee.  See G.S. 18B-1307(b1)(1).
  • Whether the proposed transferee has proven business experience to hire and maintain a management team.  See G.S. 18B-1307(b1)(2).
  • If the proposed transferee does not have experience in the beer industry, whether it has other relevant experience and is willing to participate in training provided by the supplier.  See G.S. 18B-1307(b1)(3).
  • Whether the proposed transferee is already a wholesaler for the supplier in a different territory and whether it can devote time and attention to additional market area. See G.S. 18B-1307(b1)(4).

 

In determining whether a proposed transferee, or the entity resulting from a merger, is a qualified person, a supplier must consider the business on its own merits and may not designate a specifically identified person as the only purchaser who will be approved.

 

Supplier’s Right to Match and Reassign to Its Designee:  The amendment provides that it is not intended to, nor should it be construed to, interfere with a supplier's right to match and reassign to a designee the right to purchase the ownership interest in the wholesaler’s business, subject to the designee purchasing the ownership interest at the price and on the conditions applicable to the purchase proposed by the transferee.  See G.S. 18B-1307(b). 

 

Non-Waiver of Franchise Rights

 

Senate Bill 745 provides that a wholesaler’s rights under the Beer Franchise Law cannot be waived or superseded by a written franchise agreement. The rights of a wholesaler under the Beer Franchise Law shall remain in effect regardless of a provision in a written franchise agreement prepared by a supplier that purports to require arbitration of a franchise dispute or that purports to require legal remedies to be sought in a different jurisdiction.  See G.S. 18B-1308.

 

Mediation by ABC Commission and Effect on Lawsuits

 

Senate Bill 745 provides that the Commission, upon request of any party to a dispute or on its own initiative, may require parties to participate in mediation in an effort to resolve the dispute.  See G.S. 18B-1309.  This authority is in addition to the Commission’s authority to issue declaratory rulings.  The Commission may designate the mediator, or direct the parties to agree.  The Commission shall direct that the mediation be completed within a specified period of time. 

 

Except for injunctive relief, no lawsuit or other legal action concerning the dispute may be filed until the mediation is completed and is unsuccessful, unless necessary to avoid expiration of a statute of limitation.