United States: Ohio Court Of Appeals Upholds A Successor Manufacturer's Termination Of A Distribution Franchise

The "successorship" provision of Ohio's franchise law for alcohol beverages has spawned much litigation over the past two decades.  Premium Beverage Supply, Ltd. v. TBK Production Works, Inc. represents the latest chapter of this saga, providing further clarity on several issues in the Ohio Alcoholic Beverage Franchise Act (Franchise Act).

In Premium Beverage Supply, the Court of Appeals for the Tenth Appellate District of Ohio considered whether The Brew Kettle Production Works (Brew Kettle) could terminate an agreement appointing Premium Beverage Supply (Premium) as the sole distributor of TBK craft beers after Brew Kettle purchased all of TBK's assets.  The trial court held that Brew Kettle could not terminate or cause the termination of Premium's franchise.  The trial court reasoned:  (1) the terms of the distribution agreement controlled, as opposed to a provision in the Franchise Act permitting a successor manufacturer to terminate or fail to renew a distributor's franchise in certain situations; and (2) Brew Kettle was not a successor manufacturer within the meaning of the Franchise Act.  The Ohio Court of Appeals reversed the lower court and remanded the case to address Premium's claim for compensation due to the termination of the distribution agreement.

First, the appellate court examined whether the statutory provisions in the Franchise Act permitted Brew Kettle to terminate or not renew Premium's distribution franchise.  The Franchise Act generally prohibits a manufacturer from terminating or failing to renew a distribution franchise without prior consent unless the manufacturer has "just cause" and provides sixty days prior notice.  The Franchise Act provides an exception to the usual just cause requirement for termination if "a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition or acquires or is the assignee of a particular product or brand of alcoholic beverage from another manufacturer."  In such a case, the successor manufacturer has ninety days to give written notice of termination of the franchise to the distributor.  In Esber Beverage Co. v. Labatt USA Operating Co., the Supreme Court of Ohio upheld this exception to the usual just cause requirement and concluded that a written franchise agreement did not override the statutory exception.  Citing Esber, the Ohio Court of Appeals held that the trial court erred in finding the distribution agreement prevented Brew Kettle from terminating Premium's franchise.

Second, the Ohio Court of Appeals reviewed the definition of the term "manufacturer" under the Franchise Act, because the act does not define the phrase "successor manufacturer."  The appellate court held that neither the law nor the asset purchase agreement required Brew Kettle to hold all necessary production licenses in order to be considered a successor manufacturer within the meaning of the Franchise Act.  The court then evaluated Premium's argument that Brew Kettle was not a successor manufacturer under the provision of the Franchise Act that defines situations that do not constitute "just cause," because the owner of TBK also owned a minority interest in Brew Kettle.  Noting the asset sale was an arms-length transaction, the court weighed the totality of the circumstances and held that Brew Kettle was not controlled by the individual with the minority interest.

Finally, the Ohio Court of Appeals considered whether the case should be remanded to address whether the statutory exception to the usual just cause requirement resulted in an unconstitutional taking.  Premium argued that the termination of its distribution franchise was a state-sanctioned taking for private use.  The U.S. District Court for the Southern District of Ohio previously determined that a taking did not occur when a private party used the statutory exception to the usual just cause provision to terminate a distributor's franchise agreement.  The Ohio Court of Appeals agreed and held that the termination of the distributor's franchise agreement did not constitute a taking.

Ohio Court Of Appeals Upholds A Successor Manufacturer's Termination Of A Distribution Franchise

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