We’ve had the ability to do guest columns on this website but never utilized it until now. These guest columns are not to be considered legal advice but rather are thoughts on issues relating to alcohol law and policy. The first guest column is brought to us by Mike Madigan, a partner in Madigan, Dahl and Harlan in Minneapolis, Minnesota and veteran of the alcohol litigation wars.
WHY SHOULD THE PUBLIC CARE ABOUT BEER FRANCHISE LAWS?
The beer industry in the United States has recently undergone dramatic change. While the industry as a whole has been consolidating for years, the creation in 2008 of two global behemoths, Anheuser-Busch InBev (ABI) and MillerCoors LLC (MillerCoors), has concentrated 80 percent of United States beer sales into two foreign-owned companies. ABI is based in Belgium and is managed by Brazilian leadership. MillerCoors is based in London and is primarily managed by South African leadership. The Marin Institute (now known as Alcohol Justice) has described these developments as creating a “Big Beer Duopoly.” The economic and political power of these international organizations cannot be underestimated, and their impact on alcohol regulation, small brewers, and public health and safety in the U.S. is significant.
Under these circumstances, beer franchise laws, which govern the relationship between brewers and distributors, take on a growing importance. There are two complimentary purposes and
policies that underlie beer franchise laws.
First, beer franchise laws promote and support the “three-tier” system and “tied-house” laws. As recognized by the U.S. Supreme Court, under the 21st Amendment, “within the area of its jurisdiction, the state has ‘virtually complete control’ over the importation and sale of liquor and the structure of the liquor distribution system.” North Dakota v. United States, 495 U.S. 423, 431 (1990). Pursuant to the 21st Amendment power, most states have adopted the three-tier system with tied-house bans. The three-tier system mandates separation of the alcohol/beverage industry into three tiers: supplier, distributor and retailer.
As recently noted by the Louisiana Court of Appeals:
“Without the three-tier system, the natural tendency historically has been for the supplier tier to integrate vertically. With vertical integration, a supplier takes control of the manufacture, distribution, and retailing of alcoholic beverages, from top to bottom. The result is that individual retail establishments become tied to a particular supplier. When so tied, the retailer takes its orders from the supplier who controls it, including naturally the supplier’s mandate to maximize sales. A further consequence is a suppression of competition as the retailer favors the particular brands of the supplier to which the retailer is tied to the exclusion of the other suppliers’ brands. With vertical integration, there are also practical implications for the power of regulators. A vertically integrated enterprise – comprising manufacture, distribution, and retailing – is inevitably a powerful entity managed and controlled from afar by non-residents.
The three-tier system was implemented to counteract all these tendencies. Under the three-tier system, the industry is divided into three tiers, each with its own service focus. No one tier controls another. Further, individual firms do not grow so powerful in practice that they can out-muscle regulators. In addition, because of the very nature of their operations, firms in the wholesaling tier and the retailing tier have a local presence, which makes them more amenable to regulation and naturally keeps them accountable. Further, by separating the tiers, competition, a diversity of products, and availability of products are enhanced as the economic incentives are removed that encourage wholesalers and retailers to favor the products of a particular supplier (to which wholesaler or retailer might be tied) to the exclusion of products from other suppliers.”
Manuel v. State of Louisiana, 2008 WL 1902437 (April 30, 2008 La. App. 3 Cir.) (rejecting an antitrust challenge to state liquor laws).
As noted by the U.S. Supreme Court, “the three-tier system itself is unquestionably legitimate.” Granholm v. Heald, 544 U.S. 460, 488-89 (2005).
With regard to “tied houses,” the seminal text on liquor regulation notes:
“The ‘tied house’ system had all of the vices of absentee ownership. The manufacturer knew nothing and cared nothing about the community. All he wanted was increased sales. He saw none
of the abuses, and as a non-resident he was beyond local social influence. The ‘tied house’ system also involved a multiplicity of outlets, because each manufacturer had to have a sales agency
in a given locality. In this respect the system was not unlike that used now in the sale of gasoline, and with the same result: a large excess of sales outlets. Whether or not this is of concern to the public in the case of gasoline, in relation to the liquor problem it is a matter of crucial importance because of its effects in stimulating competition in the retail sale of alcoholic beverages.
Fosdick and Scott, Toward Liquor Control at 43 (Harper & Bros. Publishers 1st Ed. 1933).
It is impossible to have an effective three-tier system and tied-house ban without ensuing relatively equal bargaining power between suppliers and distributors. Beer franchise laws safeguard the independence and relative bargaining power of distributors vis-à-vis suppliers and thereby ensure that distributors may fulfill their public policy functions of serving as a buffer between suppliers and retailers, preventing vertical integration of the industry and ensuring local control and accountability of alcohol distribution channels.
Second, beer franchise laws, like all franchise laws, are remedial legislation designed to address the unequal bargaining power existing between a “franchisor” and a “franchisee,” ensure fairness and equity in the relationship and protect a “franchisee’s” equity from arbitrary and capricious termination. See, e.g. Arneson Distributing Co., Inc. v. Miller Brewing Company, 117 F.Supp.2d 905 (D.
Minn. 2000). Beer distributors make substantial investments of capital and personnel to create a market for a supplier’s products within their territories. Beer franchise laws protect that investment from arbitrary and capricious termination by suppliers. A supplier must have “good cause” to terminate and usurp that investment. As a consequence of the strong public policy underlying beer franchise laws, they are deemed to be “remedial legislation” which “should be given a liberal construction to effectuate its statutory purpose.” Arneson Distributing Co., Inc. v. Miller Brewing Company, 117 F.Supp.2d 905 (D. Minn. 2000).
CONCLUSION
Beer franchise laws are more important and needed today than perhaps at any time in recent history. Never before has market power been concentrated in two international companies which control over 80 percent of the U.S. beer market. Never before has the imbalance between supplier and distributor been so great. Without beer franchise laws, distributors will be unable to maintain meaningful independence from suppliers and will be unable to fulfill their quasi-regulatory roles as a buffer between suppliers and retailers, thereby preventing the vertical integration of the industry.
Furthermore, by safeguarding the independence of distributors, beer franchise laws promote consumer choice and product diversity because distributors are free to carry the products of any supplier, particularly those of the growing craft segment. Small craft brewers lack the substantial resources required to make a market for a new product. Independent distributors are able and willing
to make that investment on behalf of craft brewers. Without beer franchise laws, however, the dominant suppliers will insist upon exclusive distribution and all but shut down this exciting market segment.
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