Many states, including New York, have alcoholic-beverage franchise laws. These laws are intended to promote stability and fairness among suppliers and wholesalers. They address a perception that the supplier has much more power in the relationship than the wholesaler by requiring the supplier have “good cause” before it may terminate a distribution agreement with a wholesaler. Which beverages are subject to a franchise law, what constitutes “good cause,” and the consequences that will result from a termination that fails to meet that standard varies from state to state. 

Often, a supplier will enter into an agreement with a single wholesaler or importer that then appoints multiple distributors and sub-distributors in other states. This means there is often never a direct contractual relationship between the supplier and the wholesalers that distribute its products. This direct relationship is known as “privity of contract.” This raises the question, “Will a wholesaler obtain franchise rights without privity of contract with the supplier?”

New York has a beer franchise law and in a recent case the Second Department of the Appellate Division of the Supreme Court of the State of New York, called JRC Beverage, Inc. v. K.P. Global, Inc., Case No. 2021-01286, addressed this question.

The plaintiff in that case is a beer wholesaler that distributed certain brands of beer produced by a South Korean brewery. Its distribution rights did not come directly from the brewery. Rather, they came from an importer appointed by the brewery. After that importer entered into a distribution agreement with the New York wholesaler, the brewery replaced the importer based upon a claimed breach of contract. 

When the new importer replaced the initial New York wholesaler, the initial wholesaler sued the new importer, the new wholesaler and the brewery.  It based this claim on New York’s beer franchise law, Alcoholic Beverage Control Law (“ABCL”) § 55-c. The brewery and new importer claimed they had no business no privity of contract with the initial wholesaler. 

The court opined that New York’s beer franchise law does not require a relationship between the supplier and the wholesaler. Once appointed, the beer wholesaler has vested franchise rights that include the right to continue to distribute the brand.

The court based its decision on ABCL § 55-c. It looked to the definition of “brewer” and the definition of “successor to a brewer.” These terms are broadly defined in the statute. The term “brewer” includes an “importer” or the “agent” of an importer “who sells or offers to sell beer to a [New York] beer wholesaler.” And a “successor to a brewery” means anyone who “acquires the business or beer brands of a brewer” by way of a variety of means and to varying degrees.

The court also focused on subsection 4 of the statute, which provides, “No brewer may cancel, fail to renew, or terminate an agreement unless the party intending such action has good cause for such cancellation, failure to renew, or termination….”

So, the question for the court was whether the new importer was a “brewery in successor” to the original importer, who was a “brewery” covered by the franchise law. Because this was a case of first impression, the court looked to see how other jurisdictions handled the issue: “While these other courts have generally favored the position of the importer over that of the wholesaler, their determinations turned heavily upon the specific language of the state statutes at issue.”

The court went on to say, “Here, based upon the specific language of New York’s statue, we conclude that the plaintiff’s position is correct. Contrary to the defendants’ contention, nothing in the definition of “successor to brewer’ requires privity of contract between the successor and the entity it is succeeding.”  

Thus, in New York, if a brewer appoints an importer and the importer appoints a wholesaler, that wholesaler has franchise rights under the beer franchise law and cannot be terminated without good cause. 

Approximately 20 states have laws granting franchise rights to wholesalers in one or more types of beverage alcohol. Each of these states has its own rules regarding the circumstances under which a wholesaler may be terminated. The lesson is clear. A supplier should examine what franchise laws, if any, apply in each state in the territory granted to a wholesaler and importer. Franchise laws may be a minefield for the unwary.

^{Keven Danow is an attorney representing members of all three tiers of the Beverage Alcohol Industry and a member of the firm of Danow, McMullan & Panoff, P.C., 275 Madison Ave, NY, NY 10016 (212-370-3744). Website: dmppc.com; email: kdanow@dmppc.com. Brian Fink is an associate of the firm of Danow, McMullan & Panoff, P.C. and is admitted in New York and Washington State.  Email bfink@dmppc.com.}