It’s a familiar story. Two families invest all their cash (and then some) and start a small brewery. First, there is just a taproom, then a few bars and more accounts, some notoriety and favorable publicity. Pretty soon, the founders simply don’t have enough time to make great beer, market it, and deliver it to the growing list of customers. Eventually, with extra capacity comes the potential for geographic expansion and a realization that self-distribution is neither a legal nor a practical option. It’s time for a big step—to independent distribution. Here, we discuss what you need to know about negotiating a distribution agreement for the first time.
Legal Background
The three-tier distribution system for alcoholic beverages (suppliers, distributors, and retailers) was first enshrined in state law following the end of Prohibition. In many states (and particularly with beer), the distribution of alcoholic beverages was required to be through independent distributors. “Tied house” laws in nearly every state prohibited ownership at multiple levels of the distribution system. Thus, a brewer couldn’t own an interest in a distributor or a retail outlet, and a distributor couldn’t own an interest in a brewer or a retailer.
Later, state legislatures responded to complaints from distributors about mistreatment by large brewers by enacting sweeping distributor-protection laws, which trumped provisions in distribution contracts. State distributor-protection laws typically render distribution rights perpetual, despite what a contract might say. Under these laws, the distribution contract runs forever unless the brewer can show that
- (S)he has good cause to terminate or non-renew, meaning a breach of the distribution agreement or inability of the distributor to carry out its obligations;
- The distributor is given a lengthy period to correct the problems and fails to do so;
- The brewer acts in “good faith.”