A recent Ohio Supreme Court decision, Esber Beverage Co. v. Labatt USA Operating Co., L.L.C., Slip Opinion No. 2013-Ohio-4544 has important implications for successor manufacturers and distributors of alcoholic beverages. Esber resolved a frequently litigated question relating to the respective rights of manufacturers and distributors of alcoholic beverages under the Ohio Alcoholic Beverages Franchise Act, R.C. 1333.82 et seq., when a manufacturer sells all of its rights relating to a particular brand of alcoholic beverage to a successor manufacturer. Specifically, the Ohio Supreme Court described the issue presented in Esber in its oral argument previews http://www.supremecourt.ohio.gov/PIO/oralArguments/13/0508/0508.asp as: “When a new owner acquires a company that manufactures alcoholic beverages, and in doing so assumes the previous owner’s franchise agreements with local wholesaler/distributors, does a provision added to Ohio’s Alcoholic Beverages Franchise Act in 1994 give the successor owner an independent statutory right to later terminate its franchise agreement with an Ohio distributor without ‘just cause,’ notwithstanding the terms and conditions of the franchise agreement?” The Ohio Supreme Court answered with a resounding “yes.”
Factual Background and Procedural History
In March 2009, Labatt USA Operating Company LLC (“Labatt Operating”) acquired from the previous owner, InBev USA, the assets necessary to import and sell Labatt beer products in the United States. As part of that transaction, Labatt Operating expressly assumed InBev’s existing distribution agreements for Labatt products with various wholesale distributors throughout the U.S., including its agreement with Canton-based Esber Beverage Company, which had been the exclusive distributor of Labatt products in a 10-county area of northeast Ohio for more than 50 years. Labatt Operating invited the Labatt distributors in Ohio to make a presentation as to why they should be chosen to distribute the Labatt brand products for various regions in Ohio. Esber made their pitch and requested both to continue distributing products in its existing territory and to expand its distribution territory to additional counties. But in a letter dated May 15, 2009, Labatt Operating sent a letter to Esber stating that it intended to terminate Esber as a Labatt wholesaler without cause, pursuant to R.C. 1333.85(D), a provision of Ohio’s Alcoholic Beverages Franchise Act (ABFA).
Esber filed suit against Labatt Operating in the Stark County Court of Common Pleas. The trial court ruled in favor of Esber, granting a preliminary injunction ordering Labatt Operating to continue to distribute its Labatt products through Esber, and it later granted partial summary judgment in Esber’s favor. The trial court held that the franchise-termination rules of R.C. 1333.85(D) apply to a successor manufacturer only when no written franchise agreement existed between the distributor and the former manufacturer.
Labatt appealed. On review, the Fifth District Court of Appeals reversed the trial court’s decision and held that R.C. 1333.85(D) does give a successor manufacturer the right to terminate a franchise agreement within 90 days of acquiring the brand and that the statute does not differentiate between successors to manufacturers that had written franchise agreements and successors to manufacturers that had franchise agreements that had arisen by operation of law. Therefore, following a de novo review, the court of appeals ruled that Labatt Operating was permitted by R.C. 1333.85(D) to terminate the franchise agreement as a matter of law and that the trial court should have granted summary judgment in favor of Labatt Operating.
The Ohio Supreme Court’s Ruling
The Ohio Supreme Court affirmed the Fifth District Court of Appeals’ decision. As a threshold matter, the Ohio Supreme Court recognized that “an alcoholic-beverage-distribution franchise is a creature of statute.” The Ohio Alcoholic Beverages Franchise Act was enacted by the General Assembly in 1974, and its purpose was “to eliminate unfair practices by beer and wine manufacturers in their dealings with distributors.” The General Assembly included language in the act specifying that all contractual provisions that waive or fail to comply with the act are void. R.C. 1333.83.
The Ohio Supreme Court then held that the plain language of R.C. 1333.85(D) allows a successor manufacturer to terminate a franchise. Specifically, the Ohio Supreme Court held that allowing a successor manufacturer to terminate a written franchise agreement without cause is clearly permitted under R.C. 1333.85(D), as long as the successor manufacturer provides written notice of the termination to the distributor within 90 days of the sale, merger, or acquisition, and as long as compensation for the lost value of the franchise is provided. Moreover, pursuant to statute, the parties are unable to restrict this right of termination by contrac under R.C. 1333.83. Thus, the Ohio Supreme Court held that Labatt Operating’s termination of Esber met the statutory requirements of the Ohio Alcoholic Beverages Franchise Act because Labatt Operating is a successor manufacturer who gave notice of its intention to terminate to Esber within 90 days of its purchase of the Labatt brands from InBev and accepted responsibility in its notice of termination to compensate Esber in accordance with R.C. 1333.85(D). Accordingly, the Ohio Supreme Court affirmed the Fifth District Court of Appeals’ judgment holding that it was error for the trial court to grant summary judgment to Esber because summary judgment should have been granted to Labatt Operating as a matter of law.