District Court in Michigan Compels Arbitration in Virginia Beer Franchise Dispute

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The federal district court for the Western District of Michigan recently issued an opinion that underscores the ability of parties to a distribution – or virtually any – contract to select arbitration as the exclusive method for handling disputes between them. The decision underscores the federal policy in favor of arbitration and provides craft brewers with an opportunity to reflect on the pros and cons of arbitrating disputes.

The Bell’s Brewery v. Blue Ridge Beverage Co. Case

The case is Bell’s Brewery v. Blue Ridge Beverage Co. and their dispute dates back to 2019, after Bell’s withdrew from the Virginia market. (Bell’s withdrawal from the state was precipitated by a proposed transfer of Bell’s distribution rights in a part of Virginia to an affiliate of Reyes Holdings.) After Bell’s withdrawal and as authorized by Virginia’s Beer Franchise Act, Blue Ridge commenced a proceeding before the Virginia Alcoholic Beverage Control Authority (ABC) alleging breach of contract and violations of the Franchise Act.

The written distribution agreement between Bell’s and Blue Ridge called for arbitration of “[a]ll claims disputes and other matters arising out of or relating to this Agreement[.]” Bell’s accordingly petitioned the Western District of Michigan to “compel” arbitration – an action authorized by the Federal Arbitration Act – to force the parties into arbitration.

Reviewing the arbitration provisions in light of Virginia law and the federal policy in favor of arbitration, the court noted that in the absence of other facts, the suit would present a rather straightforward case in which it would compel arbitration. But one important fact required further analysis: When signing the contract, Blue Ridge’s president hand wrote a note on it that said, “I waive no rights under Virginia law.” As the Virginia Beer Franchise Act contemplates a hearing before the ABC, Blue Ridge argued that the handwritten note reserved its right to proceed before the ABC.

Reviewing the Franchise Act, the court found nothing that made the ABC the exclusive forum for disputes. The court explained that such a reading would effectively amend the statute (something courts should not do) by inserting the word “exclusive” into the provision granting the ABC jurisdiction over Beer Franchise Act disputes. The court also cited a 2019 ABC decision in another case involving Bell’s, Loveland Distributing v. Bell’s Brewery, which concluded that the “fairness” theme underpinning the Beer Franchise Act was advanced by enforcing the terms of an agreement voluntarily entered into by the parties. While the ABC later vacated the Loveland decision, it did not, according to the court, abandon its finding that the Franchise Act does not preclude arbitration. For those same reasons, the court reasoned that the agreement’s identification of Virginia law as its governing law did not mean that the parties cannot arbitrate their dispute.

The court ended by addressing the obscure legal issue of “abstention.” Abstention doctrines allow federal courts to decline to hear issues under certain circumstances. Blue Ridge argued that because its matter also was pending before the ABC, the court should abstain from hearing the case in favor of the ABC. The district court, noting that the ABC itself had “stayed” (put on hold) its proceeding pending the court’s decision on arbitration, declined to abstain.

What Might Be Next?

What’s next will depend on the actions of the litigants and the ABC. Blue Ridge can appeal the district court’s judgement, although it would not likely get any relief quickly. What’s more, the Western District of Michigan’s interpretation of the Virginia Beer Franchise Act as not mandating an exclusive forum does not appear to be clearly vulnerable to reversal on appeal. And as a final consideration, a different interpretation of the Beer Franchise Act would likely raise another important issue: Whether the Virginia legislature can preclude arbitration in the face of the Federal Arbitration Act and the federal policy favoring arbitration. Tribunals in several other states have held that state franchise law provisions purporting to prohibit arbitration are “preempted” by the Federal Arbitration Act and, thus, unenforceable.

More pressing is how the ABC responds to the Western District of Michigan’s decision. It could extend the “stay” (currently set to expire later this month) and allow arbitration to proceed. More dramatically, however, it could implicitly disagree with the court and resume active proceedings in the administrative action currently before it. Doing so, however, would risk a potential showdown with the federal court.

The Pros and Cons of Arbitration

When thinking about the Bell’s Brewery v. Blue Ridge case it is useful to review the pros and cons of arbitration. Put a few lawyers in a room and they can spend hours debating this topic. But, in brief, the most frequently-cited points include:

The parties can craft their own process – a comprehensive arbitration clause can spell out details like the place of arbitration, applicable rules, and even the scope of discovery. And because the Federal Arbitration Act creates a federal policy favoring arbitration, such dispute resolution agreements are more likely to be enforced by the courts.Very limited appeal rights. Using a panel of three arbitrators helps mitigate this by guarding against the one "bad" arbitrator, but it increases costs.
Traditionally lower overall costs were ascribed to arbitration, but this is increasingly questioned, particularly in arbitrations that do not involve an expedited process and/or limits on discovery.The parties bear the extra cost of paying the arbitrator(s). And because arbitrators usually get paid by the hour, some lawyers fear that arbitrators may take actions to lengthen the time it takes to arbitrate a dispute.
Arbitrators were traditionally viewed as more practical and business-friendly, and thus more "predictable" than courts (especially jury trials). This, too, is sometimes questioned today.As a corollary to arbitrators' alleged "practical" orientation, arbitration is sometimes criticized for leading to indecisive results that "split the baby."
By choosing arbitration, litigants can avoid forums (e.g., a particular state's court system) perceived as unfair to one of the parties. This is a major reason, for example, that a great many commercial contracts between parties in different countries chose arbitration rather than give either party the "homefield advantage" of its national court system.Arbitration creates no binding precedent. For a business that expects to address the same issue multiple times, this can become a major problem over time.

Craft brewers need to understand the relative benefits and drawbacks of arbitration when contemplating whether to agree to arbitrate a dispute arising from a particular agreement – distribution or otherwise. The Bell’s Brewery v. Blue Ridge decision highlights the power of such clauses, as it will allow Bell’s to put its case before a different forum than the one favored by Blue Ridge.

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