Legal Issues Involved When Alcoholic Beverage Suppliers Attempt to Terminate Brand Shipments To Wholesalers In Massachusetts

By John P. Connell, Esq.

Introduction

General Laws c. 138, §25E, makes it an unfair trade practice for an alcoholic beverage supplier, absent “good cause,” to refuse to sell to a wholesaler a brand item if the supplier “has made regular sales of such brand item [to the wholesaler] during a period of six months preceding any refusal to sell.” The purpose of this statute preventing suppliers from terminating their wholesalers is to counteract the tendency toward vertical integration in the liquor industry – the so-called “tied house” evil. Further, §25E, was enacted in part to redress the perceived economic imbalance in the business relationships between suppliers and wholesalers. Seagram Distillers Co. v. ABCC, 401 Mass. 713, 716 (1988).

The protections afforded by Section 25E apply only to specific individual “brands” which the wholesaler has purchased from supplier within the past six months, and does not apply to all “brands” that a supplier may offer for sale while doing business with a particular wholesaler. M.S. Walker v. Jim Bean Brands Company, No. 25E-1272 (ABCC Decision dated September 1, 2009); See also Classic Wine Imports, Inc. v. Rosemount Estates, Inc., 25E-1163 (ABCC Decision dated January 20, 2000).

Upon an “application” to the Commission for a supplier’s alleged failure to adhere to the protections afforded by §25E, the Commission “shall” order the supplier to continue making shipments to the affected wholesaler in the regular course of business while the Commission undertakes to determine whether a violation of §25E has occurred.

There appears to be no specified “statute of limitations” for filing such an application. In Heublein v. ABCC, 30 Mass. App. Ct. 61 (1991), a wholesaler did not file its “appeal” with the Commission for approximately nine months after it received its termination notice. The Court held that the six-month period contained in §25E was not a “statute of limitations” within which the affected wholesaler was required to assert its rights to the Commission but held, rather, that the Commission had “some discretion” whether the appeal was timely filed. Id. at 616.

A. What Constitutes Good Cause?

G.L. c. 138, §25E(a)-(e) defines “good cause” as “limited” to the following conduct: (a) disparagement of the product so as to impair the reputation of the brand owner or the brand name of any product; (b) unfair preferment in sales effort for brand items of a competitor; (c) failure to exercise best efforts in promoting the sale of any brand item; (d) engaging in improper or proscribed trade practices; or (e) failure to comply with the terms of sale agreed upon between supplier and wholesaler.

With respect to the last indicia of “good cause” set forth in §25E, the failure to comply with the “terms of sale,” the Commission has further required that any breach of terms of sale must be “material,” or a fundamental breach of the agreement. Whitehall Co. v. Guild Wineries & Distillery, Inc., ABCC Decision, February 27, 1986. Section 25E allows either party to appeal to the Commission for a hearing on the notice of discontinuance. It also requires the Commission to “make a determination after hearing on the issue of good cause for discontinuance.” See Heineken U.S.A. v. ABCC, 62 Mass. App. Ct. 567, 577 (2004).

B. The Written Notice Requirement

Section 25E provides that a manufacturer and supplier “shall forward
a notice in writing to the wholesaler, to whom it has sold any brand item, prior to discontinuing sales to such wholesaler of such brand item.” The written notice of discontinuance must be given to the wholesaler, and copied to the Commission, “at least one hundred and twenty days before the effective date of such continuance.” G.L. c. 138, §25E. Failure to provide this written notice of discontinuance to a wholesaler by a supplier, even where the supplier believes the wholesaler has gone out of business or is experiencing financial troubles, will constitute a violation of Section 25E by the supplier that ceases shipments to the wholesaler. See Heineken U.S.A. v. ABCC, 62 Mass. App. Ct. 567, 577 (2004).

C. Curtailed Shipments By Supplier

What constitutes a supplier’s “refusal to sell” alcoholic beverages to a wholesaler? In Somerset Importers v. ABCC, 28 Mass. App. Ct. 381 (1990), a wholesaler was re-selling gin sold to it by a supplier to another wholesaler to whom the supplier of gin did not want to do business with, a practice not forbidden by the version of G.L. c. 138, §25E (or §18) in effect in 1990. Accordingly, the wholesaler was demanding sales far above that which it needed to satisfy its retail customers and as a result of these so-called “back-door” sales to another wholesaler, the gin supplier refused to honor those enhanced purchased orders.

Upon the complaint by the wholesaler against the supplier for its alleged failure to sell product, the Commission determined that a “refusal to sell” should be defined as a “material curtailment of the volume of sales made in the regular course of business.” In other words, while curtailing shipments to a wholesaler so as weaken the wholesaler’s position in the marketplace would be “material,” and therefore a violation of G.L. c. §25E, failing to honor significantly enhanced orders from a wholesaler would not necessarily be a violation of G.L. c. §25E.

In order to further delineate this difference, the Commission arrived at a mathematical figure that anticipated the natural market growth anticipated by most wholesalers, and required the gin supplier to sell to the wholesaler, upon demand, 110% of the highest annual volume, by size, sold to the wholesaler by the supplier in the preceding four calendar years. Such a determination of what would and would not constitute a “refusal to sell” under these circumstances was found to be reasonable by the Court. Somerset Importers v. ABCC, 28 Mass. App. Ct. at 387-388. The Commission, apparently as a matter of routine, has now cited the holding in Somerset in ordering suppliers accused of violating Section 25E to continue selling “up to 110% per year of the highest annual sales, by product and size, sold to the wholesaler during the preceding four or five years” when complying with Section 25E’s mandate that a supplier must continue to sell to a wholesaler while an application to the Commission for violation of Section 25E is pending. Milton’s Distributing Co., Inc. v. Dao Sul-Sociedade Viticinicola, No. 25E-1271 (ABCC Decision dated August 26, 2009).

A supplier’s “rationing” of sales in some circumstances, however, may be non-violative of G. L. c. 138, §25E. Id. at 385. (“In deciding that a partial refusal to ship an order constituted a violation of §25E, the ABCC expressly acknowledged that the case might stand otherwise were it commercially impracticable for an importer to fill an order. If inventory at the source were exhausted by a sudden surge in popularity of a product or by disruption in the supply line (e.g., drought, frost, fire, strike, shipwreck) an importer could, presumably, ration its existing stock to its customers on a prorated basis.”)

D. Section25E’s Protections Follow The Brand

As set forth above, the protections afforded by Section 25E apply only to specific individual “brands” which the wholesaler has purchased from supplier within the past six months, and do not apply to all “brands” that a supplier may offer for sale while doing business with a particular wholesaler. M.S. Walker v. Jim Bean Brands Company, No. 25E-1272 (ABCC Decision dated September 1, 2009); See also Classic Wine Imports, Inc. v. Rosemount Estates, Inc., 25E-1163 (ABCC Decision dated January 20, 2000).

In M.S. Walker v. Jim Bean Brands Company, No. 25E-1272, a supplier routinely sold a particular brand of bourbon (“Jim Beam Bourbon Whisky White Label”) to a wholesaler when the supplier decided to “roll out” a new brand of whisky (“Red Stag”) through a promotional campaign that allegedly shipped both Jim Beam and Red Stag as a single “combo” product to another Massachusetts’ wholesaler on one occasion. The established wholesaler requested to purchase from the supplier the same “combo” package of both Jim Beam, which it had customarily purchased from the supplier, and Red Stag, which it had never purchased before. When the supplier refused to sell the Red Stag to the wholesaler pursuant to the “combo” promotion, the wholesaler applied to the Commission for relief pursuant to Section 25E.

The Commission found that the wholesaler “enjoys no protection under § 25E to be sold the Red Stag brand of whisky as an individual brand item [but it] does enjoy protection under § 25E to be sold the Jim Beam Bourbon Whisky White Label brand of whisky as an individual brand item. It is only from [the supplier’s] decision to combine in a single package both the Red Stag brand of whisky and the Jim Beam White Label brand of bourbon that [the wholesaler] has any claim to the Red Stag when it was included on a package that combined the protected brand item with the unprotected brand item.” M.S. Walker v. Jim Bean Brands Company, No. 25E-1272, at page 3. Under the facts of M.S. Walker v. Jim Bean Brands Company, however, the supplier quickly discontinued the “combo” promotional sale almost as soon as it began, and because the supplier was found to be no longer offering the “combo” promotion in Massachusetts, the Commission declined to find it in violation of Section 25E.

The cases is illustrative, however, that Section 25E’s protections for wholesalers follow the specific brands purchased by wholesalers and “new” or “different” brands offered by longstanding suppliers are not necessarily protected. What may constitute a “new” or “different” brand, and perhaps the motivations for spinning-off a new brand from an old brand, are perhaps facts for another case some day.

E. Suppliers Do Not Inherit The Obligations of § 25E When
They Purchase Business From Unaffiliated Predecessors

Often times, the business of an alcoholic beverage supplier is sold to a new entity that wishes to change the wholesaler that was used by the selling supplier within the previous six months. Generally speaking, a supplier is not obligated under §25E to continue to make sales to those wholesalers with whom an unaffiliated predecessor did business. See Pastene Wine & Spirits Co. v. ABCC., 401 Mass. at 616, 619 (alcoholic beverage producer who acquired and liquidated its independent importer-supplier and began directly distributing its product did not succeed to importer’s §25E obligations); Heublein v. Capital Distrib. Co. 434 Mass. at 699, 701-702 (supplier who acquired all assets and operations related to production and sale of brand product in arm’s-length transaction did not succeed to predecessor supplier’s §25E obligations).

Where, however, a “continuing affiliation or agency relationship” exists between a supplier and its predecessor, the Commission has construed c. 138, §25E, to allow for the imputation of §25E’s obligations from the seller to the buyer. Heublein v. Capital Distrib. Co., 434 Mass. at 706. The Commission’s approach to the issue is consistent with the court’s interpretation of the statute. See Id. at 706-707 & n. 14. The rationale for imputing obligations under §25E has been found particularly compelling where the Commission has found that a transfer of distribution rights was undertaken primarily for the purpose of evading those obligations imposed by the statute. See Id. at 704; Charles E. Gilman & Sons, Inc. v. ABCC, 61 Mass. App. Ct. at 918. See Brown-Forman Corp. v. ABCC, 65 Mass. App. Ct. 498, 499-500 (2006).

A separate question is whether an “arms-length” purchaser of a supplier’s business, including its contractual obligations, requires the new supplier, as a matter of contract, to continue selling product to the wholesalers of the selling supplier. In Charles E. Gilman & Sons v. ABCC, 61 Mass. App. Ct. 916 (2004), the Appeals Court held that the selling supplier’s obligations under §25E “are unaffected by a buyer’s general contractual assumption of the seller’s liabilities under an arm’s-length asset purchase agreement” and that the §25E obligations of the seller are not imputed to the buyer under such agreements as a matter of contract law. Id. at 918. But see Jet Wine & Spirits, Inc. v. Bacardi & Co., 298 F.3d 1 (1st Cir. 2002) (the Court held that the supplier’s purchase agreement could be construed to “assume the seller’s distribution contract with the complaining wholesaler, at least to support a prima facie showing of jurisdiction.”)

The wholesaler’s protections under §25E are also lost if the wholesaler sells its business to an unaffiliated third party buyer. In Heineken U.S.A. v. ABCC, 62 Mass. App. Ct. 567 (2004), a wholesaler tried to re-structure its proposed sale to a third party to retain some ownership interest, and thereby retain the protections afforded to it pursuant to §25E, when it learned that a beer supplier would not sell product to the new buyer. The Court held that if the wholesaler’s business were sold outright, the supplier would have had no obligation whatsoever to either sell product to the buyer or even provide the buyer notice of discontinuation pursuant to §25E. Id. at 576.

F. Cancellation Clauses In Written Contracts

Notwithstanding the protection afforded wholesalers by §25E, the Commission and Massachusetts courts have recognized that the supplier and wholesaler may contract with each other and provide a “cancellation” clause that allows the supplier to terminate a supplier, or cancel its agreement, upon the happening of an event other than a material breach of that agreement, as would be required by §25E. In Seagram Distilleries v. ABCC, 401 Mass. 713 (1988), the Massachusetts Supreme Judicial Court (SJC) found that a supplier’s termination of a wholesaler based upon a change of control in the supplier’s management and therefore a trigger to the parties’ “cancellation clause” was permissible because the parties had agreed in writing to such a cancellation provision in their written contract. The SJC found that a “cancellation clause represents a reasonable method by which suppliers and wholesalers alike may protect their freedom to choose with whom they will deal.” Id. at 717. With regard to brands of beverages that were not controlled by the parties’ written contract, however, the supplier was found to be in violation of §25E, as there was no “material” breach of the parties’ agreement by the wholesaler. Id. at 719.

In summary, notwithstanding the provisions and protections afforded wholesalers by Section 25E, the parties may always contract around what the Commonwealth of Massachusetts has afforded as a matter of right to balance out the perceived natural imbalance in supplier-wholesaler business relationships. Attention to such contractual stipulations, as well as warranties made in purchase and sale agreements for the sale of a supplier and/or wholesaler business, may diminish or abrogate the sometimes harsh strictures of Section 25E.

Authorities:
G.L. c. 138, §25E
Seagram Distilleries v. ABCC, 401 Mass. 713 (1988)
Pastene Wine & Spirits Co. v. ABCC, 401 Mass. 612 (1988)
Brown-Forman Corp. v. ABCC, 65 Mass. App. Ct. 498 (2006)
Charles E. Gilman & Sons v. ABCC, 61 Mass. App. Ct. 916 (2004)
Heineken U.S.A. v. ABCC, 62 Mass. App. Ct. 567 (2004)
Heublein v. ABCC, 30 Mass. App. Ct. 61 (1991)
Somerset Importers v. ABCC, 28 Mass. App. Ct. 381 (1990)
Seagram Distilleries v. ABCC, 401 Mass. 713 (1988)
Jet Wine & Spirits, Inc. v. Bacardi & Co., 298 F.3d 1 (1st Cir. 2002)
Whitehall Co. v. Guild Wineries & Distillery, Inc., ABCC Decision, February 27, 1986.
M.S. Walker v. Jim Bean Brands Company, No. 25E-1272, ABCC Decision dated September 1, 2009.
Classic Wine Imports, Inc. v. Rosemount Estates, Inc., 25E-1163, ABCC Decision dated January 20, 2000.
Milton’s Distributing Co., Inc. v. Dao Sul-Sociedade Viticinicola, No. 25E-1271, ABCC Decision dated August 26, 2009.