Law360, New York (August 7, 2017, 3:33 PM EDT) -- The federal legal battle over Great Lakes Brewing Company’s termination of its Ohio distributor, Southern Glazer’s Distributors of Ohio (Ohio Southern Glazer’s), continued with a short-lived but important victory for Great Lakes Brewing Company before the Sixth Circuit in Southern Glazer’s Distributors of Ohio LLC v. Great Lakes Brewing Co.

The Sixth Circuit recently vacated a preliminary injunction granted by the U.S. District Court for the Southern District of Ohio that enjoined Great Lakes from terminating a franchise-distribution agreement with Ohio Southern Glazer’s. At issue was whether a contractual provision that required manufacturer consent to the transfer of distributor ownership was void under the Ohio Alcoholic Beverages Franchise Act. The Sixth Circuit concluded that it was not and reversed the injunction. In doing so, it made clear that despite various restrictions imposed by the act, manufacturers and distributors are generally free to enter into franchise distribution agreements that require manufacturer consent to the sale of the distributor’s business.

• The Sixth Circuit decision illustrates the importance of a well-written beer and wine manufacturer consent provision in franchise distribution agreements.

Within a couple of weeks of the Sixth Circuit ruling, the district court entered another injunction against Great Lakes and its co-defendant. In entering the new injunction, the district court found that proposed trial exhibits showed that a jury could find that Great Lakes unreasonably withheld its consent and that its reasoning was, in essence, pretext for its termination decision.

• The district court ruling highlights that a manufacturer must have a reasonable business case for termination that is well-documented in the pretermination strategic planning that the manufacturer engages in to prepare for a distribution change.

A stay in the case has been granted, and an appeal of the new injunction is pending before the Sixth Circuit.

Background

Great Lakes is a craft brewer based in Ohio. Its dispute with Ohio Southern Glazer’s arose out of a Gayle Littleton Brian Fischer Casey Grabenstein Licyau Wong franchise-distribution agreement (the agreement) between Great Lakes and Ohio Southern Glazer’s predecessor, Glazer’s of Ohio Inc. (Ohio Glazer’s). The agreement (1) required Ohio Glazer’s to obtain Great Lakes’ written consent to any change in ownership; (2) prohibited Great Lakes from unreasonably withholding its consent to an ownership change; and (3) permitted Great Lakes to terminate the agreement if Ohio Glazer’s failed to obtain such consent.

In January 2016, rumors emerged that Southern Wine & Spirits of America would merge with Ohio Glazer’s parent company, Glazer’s Inc., with ownership of Ohio Glazer’s transferring to the merged entity, Ohio Southern Glazer’s. Upon learning of the planned deal, Great Lakes asked Ohio Glazer’s for details to assess the company’s “options.” Ohio Glazer’s provided some information, but asserted that the transaction did not require Great Lakes’ consent because the consent requirement violated the act.

Great Lakes disagreed, and Great Lakes notified Ohio Southern Glazer’s that it was terminating the agreement based upon the failure to secure Great Lakes’ consent to the ownership transfer. At that point, Ohio Southern Glazer’s requested Great Lakes’ retroactive consent, which Great Lakes refused to provide.

The next day, Ohio Southern Glazer’s filed suit in federal court in Ohio and sought an emergency preliminary injunction enjoining Great Lakes from terminating the agreement. Siding with Ohio Southern Glazer’s legal argument, and finding that Great Lakes’ termination of the agreement would cause irreparable harm, the district court issued the preliminary injunction.

Great Lakes immediately appealed to the Sixth Circuit.

Sixth Circuit Decision

On June 26, 2017, the Sixth Circuit sided with Great Lakes and reversed the preliminary injunction. In doing so, the circuit court evaluated the four considerations that guide a court’s decision to grant a preliminary injunction: (1) whether Ohio Southern Glazer’s had a strong likelihood of success on the merits; (2) whether Ohio Southern Glazer’s would suffer irreparable harm without an injunction; (3) whether the injunction would cause substantial harm to others; and (4) whether the injunction would serve the public interest.

The circuit court concluded that:

  • Ohio Southern Glazer’s had no likelihood of success on the merits because the act does not prohibit parties from contracting to require manufacturer consent before the transfer of a distributor’s business, and, in fact, contemplates that franchise agreements will include such a requirement;
  • Enjoining Great Lakes would not serve the public’s interest in holding private parties to their agreements; and
  • Though Ohio Southern Glazer’s would suffer irreparable harm absent the injunction and no harm to others would otherwise result, these factors did not justify the injunction where Ohio Southern Glazer’s could not prevail on the merits.

Likelihood of Success on the Merits and the Public Interest

Ohio Southern Glazer’s legal argument focused on two sections of the act — one that relates to the sale or transfer of the franchise and the other that relates to the sale or transfer of the distributor’s business.

  • Franchise: The act requires a distributor to obtain the manufacturer’s consent before selling, assigning or transferring the franchise (a corporate asset) and prohibits the manufacturer from unreasonably withholding that consent.
  •  Business: The act requires a manufacturer to act in good faith in accordance with reasonable standards of fair dealing with respect to the distributor’s right to sell, assign, transfer or otherwise dispose of the distributor’s business (its stock), in whole or in part.

 

Ohio Southern Glazer’s first argued that, because the act explicitly requires manufacturer consent for transfers of a distributor’s franchise while not imposing the same requirement for transfers of a distributor’s business, the omission was intentional and expressed the Ohio General Assembly’s intent to prohibit a consent requirement for a business transfer. As a result, Ohio Southern Glazer’s claimed the consent requirement in the agreement violated the act and was, therefore, unenforceable.

In support of its position, Ohio Southern Glazer’s cited Jameson Crosse Inc. v. Kendall-Jackson Winery Ltd., a 1996 case also in the Northern District of Ohio. In that case, distributor Jameson Crosse sold its ownership interest to another distributor without receiving consent from the manufacturer, KendallJackson Winery. Unlike this case, the parties had no written franchise agreement allowing KendallJackson to terminate the franchise relationship over an ownership interest sale. Without a contractual termination provision, Kendall-Jackson terminated the relationship citing provisions in the act, and in response, Jameson Crosse filed suit alleging that the termination was in violation of the act. The district court agreed, holding that, because the act only requires manufacturer consent for an asset transfer of the franchise, Kendall-Jackson’s consent was not required for Jameson-Crosse’s stock transfer of its business.

The Sixth Circuit rejected Ohio Southern Glazer’s argument, holding that it had no likelihood of success on the merits. In reaching this conclusion, the Sixth Circuit:

  • Specifically rejected the claim that the act’s omission of a manufacturer consent requirement for the transfer of a distributor’s business implied that such a requirement was prohibited by the act;
  • Noted that the act’s requirement that manufacturers “act in good faith in accordance with reasonable standards for fair dealing” in the sale of a distributor’s business necessarily implied that manufacturers could have a say over such transactions;
  • Concluded that nothing in the act prevented the parties from bargaining for rights and responsibilities in addition to those set out in the act; and
  • Distinguished Jameson Crosse because, unlike this case, there was no written distribution agreement that required Kendall-Jackson’s consent to transfer its business.

The circuit court further noted that it was not in the public interest to let the injunction stand because the public has a strong interest in holding private parties to their agreements.

Irreparable Harm and Harm to Others

Though the Sixth Circuit concluded that Ohio Southern Glazer’s had no likelihood of success on the merits, it found that irreparable harm would result to Ohio Southern Glazer’s if the preliminary injunction did not issue, and that no harm to others would result from maintaining the injunction. The agreement between Great Lakes and Ohio Southern Glazer’s contained a liquidated-damages provision, and Great Lakes argued that this provision would ensure that Ohio Southern Glazer’s would be compensated for any harm that could result from improper termination. Ohio Southern Glazer’s claimed, to the contrary, that retailers who bought Great Lakes beer also bought other items, which they would no longer purchase from Ohio Southern Glazer’s if Great Lakes products were not available.

Focusing on the cascading losses that would flow from Great Lakes’ termination, the court sided with Ohio Southern Glazer’s. The court was persuaded that the loss of the Great Lakes brand could have a spillover effect as retailers would look to other distributors to satisfy their needs, not only for Great Lakes beer, but for other items those retailers buy because they are already buying Great Lakes. Because those retailers may choose to purchase all of their products from a new distributor, the Sixth Circuit concluded that liquidated damages could not fully compensate Ohio Southern Glazer’s, as the loss of goodwill would be “substantial” given that Great Lakes made up a large portion of Ohio Southern Glazer’s portfolio. It would be, according to the court, impossible to calculate the collateral loss that Ohio Southern Glazer’s would likely suffer.

Decision

The Sixth Circuit found that two factors favored the injunction: irreparable harm and no substantial loss to others; and two factors weighed against the injunction: the likelihood of success on the merits and the public interest. Weighting the likelihood of success on the merits most heavily, the court reversed the preliminary injunction concluding that Ohio Southern Glazer’s has “no likelihood of succeeding at trial under [its] legal theory.”

District Court’s Second Injunction

A mere two days after the Sixth Circuit decision, Ohio Southern Glazer’s filed a renewed motion for injunctive relief, which the district court granted. An appeal from this second district court injunction was taken, and is now pending. At issue now is whether it was reasonable for Great Lakes to withhold its consent to its distributor’s sale of its business.

On June 28, 2017, Ohio Southern Glazer’s moved again for additional injunctive relief, this time against Great Lakes and the Boston Beer Company Inc.; the Boston Beer Corporation; and the Boston Brewing Company Inc. (collectively, Boston Beer). Boston Beer was added to the case after it also terminated its distribution agreement with Ohio Southern Glazer’s because of the merger.

Ohio Southern Glazer’s argued to the district court in its motion that Great Lakes and Boston Beer did not act in good faith and in accordance with reasonable standards of fair dealing required by the act when they withheld their consent. Ohio Southern Glazer’s further argued that the consent requirement in Boston Beer’s distribution agreement violated the act.

On July 14, 2017, the district court granted the injunction as to both Great Lakes and Boston Beer. As to Great Lakes, the district court concluded that Ohio Southern Glazer’s demonstrated a likelihood of success regarding its new argument. Essentially concluding that termination could have been mere pretext (rather than good business planning), the court noted that a jury could conclude from potential trial exhibits that Great Lakes lacked “just cause” to terminate because it: (1) used the merger as an opportunity to terminate the agreement to consolidate its distribution network; (2) had selected another distributor before it gathered all its information regarding Ohio Southern Glazer’s merger; and (3) had chosen the other distributor in part because the other distributor agreed to indemnify Great Lakes for the current litigation and not because the other distributor had the ability to adequately service and fulfill Ohio Southern Glazer’s distribution obligations.

As to Boston Beer, the district court held that the consent requirement in the Boston Beer agreement violated the act. The agreement had a manufacturer-consent requirement for the transfer of ownership, but unlike the Great Lakes agreement, the Boston Beer agreement did not include a written contractual provision that Boston Beer act reasonably in refusing to approve an ownership transfer. For that reason, the district court concluded the consent requirement violated the act. And even if it did not, the court found that Ohio Southern Glazer’s would likely succeed on the merits of the action because, like Great Lakes, the proposed trial exhibits showed that Boston Beer did not have just cause to terminate Ohio Southern Glazer’s.

The Sixth Circuit will now weigh in once again, and likely provide guidance, on when the withholding of manufacturer consent is unreasonable and what constitutes just cause under the act.

Preliminary Takeaways

As we await another opinion from the Sixth Circuit on the second injunction, the appellate and district court decisions to date provide three preliminary takeaways in Ohio for manufacturers who want to have a say over whether a distributor can transfer all or part of its business:

  1. The presence of a manufacturer-consent provision in distribution agreements can be critical. A manufacturer cannot rely on the act alone, if it wishes to have a say over whether its distributor can transfer all or part of its business.
  2. A manufacturer should consider including with the manufacturer-consent provision a provision that tracks the act by obligating the manufacturer not to unreasonably withhold consent.
  3. Under the act, a manufacturer must establish just cause to terminate a distributor. A court reviewing a termination for just cause likely will consider any manufacturer analysis of the current distributor’s proposed transaction and the replacement distributor’s ability to service the distribution area, as well as the relationship in time between that analysis and the manufacturer’s decision to terminate. As a result, in its pretermination strategic planning, a manufacturer may wish to document, in all internal communications and communications with a potential replacement distributor, how that planning supports the legitimate business case justifying termination.