Beer Franchise Law Reform

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The following piece “Beer Franchise Law Reform” was written by Brewers Association (BA) President Charlie Papazian for print in the July/August 2014 issue of The New Brewer, the BA’s bi-monthly trade journal.

Beer Franchise Law Reform  On March 30, 2014, the New York Times published an Op-Ed entitled “Free Craft Beer.” Credited to Steve Hindy, president and co-founder of the Brooklyn Brewery, it reflected the Brewers Association’s view that so-called “beer franchise laws” that exist in many states are in need of reform. The entire Brewers Association board of directors fully supported and helped draft the New York Times article.

The “Free Craft Beer” Op-Ed was a statement on behalf of American small and independent brewery members of all sizes, but is especially relevant for the Brewers Association’s smallest members, some of whom have brands hopelessly locked into exclusive beer distribution arrangements from which they want to extricate themselves, but cannot practically do so.

The singular intent of the Brewers Association’s public statement is to highlight a need for beer franchise law reform in many states. Certain people in the beer industry and the beer media have mischaracterized this singular and reasonable concern as an attack on beer distributors and all franchise laws, and as an effort to destroy the three-tier system. These charges couldn’t be further from the truth.

We have seen the following arguments against beer franchise law reform:

  • Reforming beer franchise laws in some states will compromise the three-tier system. No, it won’t. In states where franchise laws are more reasonable (e.g., Delaware, New York, Washington) or non-existent (e.g., Alaska, California, District of Columbia), the three-tier system remains vibrant and effective. Furthermore, franchise reform does not compromise public safety. The relative relationship between small brewers and distributors has nothing to do with important public safety issues like drunk driving, underage drinking, and responsible serving practices.
  • Reforming state franchise laws compromises the 21st Amendment. No, it does not. There is absolutely no reference to franchise laws or the three-tier system in the U.S. Constitution. In fact, the first franchise laws were not enacted until the 1970s and most were enacted in the 1980s.
  • Reforming state franchise laws will not incentivize beer distributors to invest in small brewers’ brands. False. It hasn’t disincentivized beer distributors in non-franchise states like California, or in states with existing reasonable exceptions like New York and Washington. It has not disincentivized wine and spirits distributors in the dozens of states where there are no franchise laws governing their distribution.
  • Reforming state franchise laws is unnecessary because small brewers can get out of a distributor’s house through the legal process. Not true. Practically speaking, the legal process is costly and smaller companies cannot afford litigation. The only successful “for cause” terminations cost at least hundreds of thousands of dollars to litigate.
  • Reforming state franchise laws benefits the larger small brewers more than the smaller ones. Absolutely not true. The smallest brewers have the fewest resources to pursue expensive litigation to get out of a bad distribution situation. The idea of franchise reform is popular among packaging Brewers Association members of all sizes.
  • Reforming state franchise laws will unfairly penalize the distributor losing a brand. Not true. In fair franchise reform, distributors who lose a brand for reasons other than “cause” should do so either in accordance with a freely negotiated agreement or receive compensation for the value of the distribution rights lost.
  • Franchise reform would devalue a distributor’s business net worth. This is true only for those that are not meeting small brands’ needs; other distributors will increase their value as they gain and grow brands through better service. It is a dangerous and ill-chosen path for any business to seek guaranteed value through legislation. In my opinion, all businesses should base their fundamental value on the quality of their service and/or products. Legislating value is a path to future instability for any business sector that does so. Current law devalues a brewer’s business because the brewer cannot move to a preferred distributor.
  • All beer distributors are “locked-in-step” and opposed to any franchise reform. Not true. Many distributors want to have the business opportunity to distribute and sell underperforming beer brands in a territorial competitor’s portfolio. Already in some states, beer distributors have actively supported a freer market through franchise reform, which has benefited beer drinkers, retailers, distributors, and brewers.
  • Franchise reform is only about small brewers’ interests. Not true. The Brewers Association supports franchise reform that focuses on preserving the rights of any brewing company that represents a small portion of a distributor’s business and therefore does not hold a bargaining power advantage over the distributor. Franchise reform could benefit imported brands and apply in any situation where a brand represents just a small fraction of a distributor’s business. The Brewers Association also wants to make sure franchise reform respects the economic stability and well-being of beer distributors’ businesses, preserving protections as applied to large percentage-of-volume brands from any sized brewery.

Some distributors and their association leadership have expressed that the Brewers Association’s support of franchise reform should not be discussed in public and that both brewers and distributors should come together and discuss the issues. The reality is that small brewers and distributors have discussed this issue in private for nearly 15 years, with no progress.

Independent beer distributors are important partners with America’s small and independent brewers. The success of many small brewers depends on the existence of strong, independent beer distributors. State law reform is best done with both brewers and distributors at the table with an open mind to existing economic conditions. When distributors refuse to accept any changes to existing franchise laws, small brewers must make their voices heard with others who will listen, most importantly with the public and concerned lawmakers. We sometimes forget that the beer drinking public created the demand for today’s beer and are interested in the dynamics that both inhibit and enhance their access to the beer they enjoy.

Finally, let’s not confuse the issue. Franchise law reform is not a federal issue. It is a state-by-state issue. Other state issues important to small and independent craft brewers—such as self-distribution, tap rooms, brewery restaurants, growler/to-go packaging, free market participation in brand ownership, the ability of a distributor to own a brewery, package size, and more—are not the same as franchise law reform and should not needlessly be connected. My opinion is that when these other issues are brought into the franchise reform discussion, it is to mask a lack of justification for current beer franchise law.

Small brewers need a strong, independent distribution system as an option to grow their brands. Distributors should be the natural allies of small brewers. The three-tier system is not threatened by franchise reform.

There’s beer at the table. Why aren’t we both sitting around that table?

Charlie Papazian is president of the Brewers Association. 

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