POLICY BRIEF FROM AMERICANS FOR TAX REFORM

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Monopoly Protection Laws Target Wine and Spirits industry- hurt consumers and taxpayers

December 14, 2001

Monopoly protection laws (also called franchise laws) shield big liquor wholesalers from the rigors of free market competition. Rather than allow competition between liquor wholesalers (also called distributors), these laws make it virtually impossible for manufacturers and importers to switch wholesalers except in the most extreme circumstances (wholesaler bankruptcy, etc.). These laws, when coupled with laws that require virtually all wine and spirits to pass through a wholesaler middle man, essentially guarantee the market position of a few giant liquor wholesalers in each state. Americans for Tax Reform ("ATR") opposes these monopoly protection laws in principle because they contradict free market principles and harm consumers for the benefit of a special interest group.

In general, monopoly protection laws require wine and distilled spirit suppliers (manufacturers and importers) to affirmatively prove that they possess "good cause" to cancel, not renew or even modify a contract with wholesalers. These laws usually do not treat a supplier's legitimate business reasons as "good cause," and always nullify contrary termination or expiration provisions of any agreement between the parties. To the extent that monopoly protection laws even treat breach of contract as good cause, they usually requires the supplier to prove that a wholesaler's breach was substantial and that the agreement's obligations were "material" or "reasonable." Moreover, monopoly protection laws usually include other provisions restricting supplier rights without regard to what the parties' agreed to by contract. Thus, often a supplier cannot object to the wholesaler's assignment of its contractual right to distribute the supplier's brand.

To the extent that monopoly protection laws even treat wholesaler breach of contract as good cause, they usually require the supplier to prove that a wholesaler’s breach was substantial and that the agreement’s obligations were “material” or “reasonable.” Consequently, almost any lawsuit by a wholesaler forces the defendant to shoulder the burden of proof and allows an ABC, judge or jury to second-guess the “reasonableness” of almost any contract provision. What’s more, monopoly protection laws usually include other provisions restricting supplier rights without regard to what the parties agreed to by contract. Thus, often a supplier cannot object to the wholesaler’s assignment of its contract to distribute the supplier’s brand.

Nothing justifies this radical interference with free market and freedom of contract principles. Wholesalers claim that monopoly protection laws protect their brand-building efforts. But wholesalers already receive compensation (typically a 20-25% mark up) that is higher than the compensation received by wholesalers in other industries and, like any business, remain free to negotiate for higher compensation. Distributors further argue that they cannot rely on contracts to protect them from more powerful suppliers. But the law already protects wholesalers from unconscionable contract provisions and requires suppliers to act in good faith. In any event, the days of the small "mom and pop" wholesaler are long over: Not including "control" states in which the government monopolizes distribution, last year more than 40% of all wine and distilled spirits in the U.S. passed through just 5 companies, with the biggest (with over $3 billion in sales) dwarfing almost all its suppliers. Why should such businesses receive special treatment?

What monopoly protection laws do accomplish is to impose costs on consumers and suppliers to the benefit of wholesalers. With little power to cancel or even modify agreements with wholesalers, supplier efforts to improve and streamline the distribution of their products are severely handicapped. The inevitable result is "shirking" by wholesalers, diminishing brand values and denying consumers the benefits of efficient service and performance.

ATR opposes monopoly protection laws in principle, as they are manifestly anti-competitive and increase consumer costs. In states that already have enacted such laws, ATR will support efforts to repeal or weaken them. In states considering such laws, ATR will vigorously oppose them.

These laws for wine and spirits are on the books in the following 14 states. (The Illinois law, the most recently enacted one, deserves special mention because it has been challenged in court.)

Alrzona Arkansas Connecticut
Delaware Georgia Illinois
Kansas Massachusetts Missouri
New Jersey New Mexico Nevada
Tennessee Wisconsin

In addition, in the following six "control states," where the state is the distilled spirits distributor, monopoly protection laws apply to wine only:

Maine Michigan North Carolina
Ohio Virginia Washington

ILLINOIS:
q The Illinois Wine and Spirits Industry Fair Dealings Act, passed in 1999, was challenged and ruled unconstitutional by the Northern District of Illinois in Kendall-Jackson Winery v. Branson, 82 F. Supp. 2d 844 (N.D. Ill. 2000). After the decision, The state Alcoholic Beverage Control board abandoned defense of the statute and the 7th Circuit held that wholesalers, alone, lacked standing to the appeal district court decision. ATR opposed the legislation during the legislative process and urged the Governor not to sign the bill.

That law would have prohibited suppliers from terminating or failing to renew agreements without good cause. Additionally, the legislation "makes permanent existing agreements between suppliers and distributors for the distribution of wine and spirits." The FTC regional staff concluded that the bill was "likely to interfere with market forces by increasing the supplier's costs…" and that "the likely result of such a static distribution system will be increased consumer prices."

q ARIZONA: Ariz. Rev. Stat. §§ 44-1565 to 44-1567.
Supplier terminations must be in good faith and for good cause. Good cause means failure to comply with provisions of agreement, so long as provisions no unconscionable. Good cause a defense (e.g., supplier must prove). Terminated wholesaler may bring civil action to recover damages and attorneys' fees.

q ARKANSAS: Ark. Code Ann. §§ 3-2-401 to 3-2-412.
Supplier must request and obtain permission of ABC to change wholesalers. ABC holds hearing to determine whether to grant or deny contested request to change wholesalers. Acceptable reasons for a change include failure to maintain a reasonable sales volume, taking into account prevailing economic conditions.

q CONNECTICUT: Conn. Gen. Stat. § 30-17.
Protections arise after six months. After six months, supplier must obtain ABC approval to terminate a wholesaler. ABC requires supplier to demonstrate it has "just and sufficient cause" to terminate wholesaler. ABC decisions hold that substantial breaches of parties' agreement do not necessarily provide cause to terminate relationship. Supplier may appoint additional wholesalers in territory, provided they give incumbent wholesaler and state six months notice of intent to do so.

q DELAWARE: Del. ABC Rule 46.
Supplier must obtain ABC approval before it can terminate a wholesaler. ABC holds hearing to decide whether to permit a contested termination. Termination requires either good cause or the payment of reasonable compensation to the wholesaler. Good cause established solely based on acts and omissions of wholesaler, including failure to cure substantial breach of material provisions of agreement within sixty days of notification. Compensation requires payment of 1 times the wholesaler's gross profits on sales of the brand for the previous three years. Supplier may appoint additional wholesalers, but only with permission of ABC and with notice to incumbent wholesalers.

q GEORGIA: Ga. Code Ann. 3-4-150 to 3-4-153; Ga. ABC Regs. § 560-2-3-.24.
Supplier must obtain ABC approval for all wholesaler appointments and changes of same. The Alcohol and Beverage Commission (ABC) will approve change in wholesalers only for cause. ABC holds a hearing to determine whether cause exists. Cause includes repeated violations of law, failure to maintain sales volume or failure to otherwise properly promote the product.

q KANSAS:
Supplier may not terminate wholesaler without notifying ABC. Supplier must possess reasonable cause for terminating wholesaler. Wholesaler may bring action in state court alleging that termination was not for cause or otherwise in violation of parties' agreement.

q MASSACHUSETTS: Mass. Gen. Laws. ch. 138, § 25E.
Protections arise after six months of "regular sales." Supplier must possess good cause before it can refuse to sell to a wholesaler to whom it previously sold. 120-day notice-and-cure provisions. Wholesaler may challenge refusal to sell before ABC. ABC decides whether good cause exists after hearing. Good cause includes failure to comply with reasonable contract terms.

q MISSOURI: Mo. Rev. Stat. §§ 311.181-311.182.
Supplier must possess good cause to terminate wholesaler and a 90-day notice period is required. Cause includes failure to substantially comply with essential and reasonable terms of the parties' agreement. Supplier must establish good cause. Wholesaler may bring private action to obtain damages, costs and injunctive relief. Attorney general separately empowered to enforce statute.

q NEW JERSEY: N.J. Stats. §§ 33:1-93.6 to 33:1-93.10.
Supplier may not refuse to sell to wholesaler in a discriminatory manner. Wholesaler may petition ABC to investigate whether refusal to sell was discriminatory. ABC decides whether supplier "discriminated" against wholesaler after ABC-administered hearing. ABC can order continued sales or prohibit all sales of supplier's product for violation of non-discrimination requirement.

q NEW MEXICO: [citation to follow]
Supplier must possess good cause and act in good faith when terminating a wholesaler. Good cause includes failure to substantially comply with essential and reasonable provisions of parties' agreement. Supplier bears burden of showing good cause. Wholesaler may bring civil action to recover actual damages and injunctive relief. Damages shall equal at least three-times annual gross profits from the sale of terminated supplier's brands.

q NEVADA: Nev. Rev. Stat. Ann. §§ 597.160-597.180.
Franchise does not apply to very small suppliers (less than 1,000 cases of wine or 250 cases of spirits per year). Supplier must act in good faith and for good cause in order to terminate. 90-day notice, 60-day cure. Good cause means failure to comply with essential and reasonable requirements, as enforced in a non-discriminatory way. Wholesaler bad faith also supplies good cause. Supplier carriers burden of showing good cause. Wholesaler may bring civil action for damages, costs and attorneys fees.

q TENNESSEE: Tenn. Code Ann. § 57-3-301.
Supplier must receive ABC approval before changing wholesaler and must possess good cause and act in good faith in order to terminate wholesaler. ABC determines supplier's good faith and good cause after a hearing and a 30 day notice-and-cure. ABC may order supplier to continue to ship to wholesaler and revoke supplier's permit or license for violation.

q WISCONSIN: Distilled Spirits Wisc. Stat. §§ 135.01-135.07.
Automatically covered under state's general dealership statute unless distiller constitutes less than 5% of wholesaler's total revenues in prior year or distiller produces less than 200,000 gallons per year. Supplier must possess good cause to terminate. Good cause includes wholesaler's failure to substantially comply with essential and reasonable requirements that are not discriminatory. 90-notice and 60-day cure. Wholesaler may bring civil action for actual damages, injunctive relief, costs and attorneys fees.

q MAINE: (Wine only): Me. Rev. Stat. Ann. tit. 28-A, §§ 1407, 1451-65. Exclusive territories required. Supplier must possess good cause to terminate. Good cause includes wholesaler's failure to substantially comply with reasonable and material requirements imposed by supplier. 90-day notice-and-cure period. Supplier must prove good cause. Wholesaler may sue supplier for wrongful termination and may seek equitable relief, compensatory damages, and (if bad faith found) punitive damages, costs and fees. Brand successors bound.

MICHIGAN (Wine only): Mich. Comp. Laws § 436.1305.
Supplier may not terminate wholesaler without acting in good faith and for good cause. 75-day notice-and-cure. Supplier must prove good cause. Wholesaler can maintain civil action challenging termination and obtain injunctive relief, actual damages and exemplary damages. Brand successors bound.

NORTH CAROLINA (Wine only): N.C. Gen. Stat. §§ 18B-1200 to 18B-1216.
Exclusive territories required unless specifically approved by ABC. Supplier must possess good cause to terminate wholesaler. ABC determines good cause for contested termination following a hearing. 60-day notice-and-cure. Good cause includes failure of wholesaler to comply substantially, without reasonable excuse or justification, with any reasonable and material requirement imposed by the supplier. ABC may punish violations by suspending or revoking supplier's permit, suspending shipments of supplier's product into the state, or imposing monetary penalties of up to $15,000 for first offense, $35,000 for subsequent offenses. Wholesaler also possesses civil remedy, and may recover damages and injunctive relief. Brand successors bound.

OHIO (Wine only): Ohio Rev. Code Ann. § 1333.82-1333.87.
Exclusive territories required. Protections arise after 90-day sales relationship. Supplier termination must be taken in good faith and for good cause. 60-day notice required. Good cause must relate to wholesaler deficiencies. Wholesaler may bring civil action for damages and injunctive relief. Brand successors bound.

VIRGINIA (Wine only): Va. Code Ann. §§ 4.1-400 to 4.1-417.
Supplier must possess good cause to terminate wholesaler. ABC determines good cause after hearing. 90-day notice and 60-day cure. Good cause must relate to wholesaler deficiency. Supplier bears burden of showing existence of good cause. ABC may award compensation, costs, fees, and may also take any action authorized by law (suspension, revocation of license, etc.) against supplier for violations. Brand successors bound.

WASHINGTON (Wine only): [citation to follow]
Act does not apply to wineries producing less than 300,000 gallons of wine annually. Supplier can terminate only for wholesaler deficiencies. 60-day notice-and-cure. Wholesaler may bring civil action for damages and injunctive relief, and prevailing party entitled to costs and fees. ABC may suspend or cancel violator's license.
Finally, the following states, which do not have monopoly protection laws on the books, may consider them in the next legislative session:

Alaska California Colorado
DC Florida Hawaii
Indiana Kentucky Louisiana
Maryland Minnesota Nebraska
New York North Dakota Rhode Island
South Carolina South Dakota Texas

CONCLUSION
State Monopoly Protection laws are bad for consumers, artificially raise the cost of the product, and provide an incentive for frivolous lawsuits, which costs taxpayers money to process. Free Market Activists and Taxpayers should vigorously oppose this legislation in states that introduce them next year (2002).