Roundup of Our Chesbay / Reyes / MillerCoors Coverage

FILED SEPTEMBER 25, 2012

Dear Client:

Here is a roundup of all of our issues to-date of the MillerCoors lawsuit against Chesbay blocking their sale to Reyes Holdings:


REYES TO BUY CHESBAY
August 31, 2012

Reyes Beverage Group has entered into an agreement to acquire 6 million case Chesbay Distributing Company from the Sampson family. Chesbay operates in Chesapeake, Virginia, carrying MillerCoors, HUSA, Crown Imports, Boston Beer, Pabst, Yuengling and Mike's Hard Lemonade brands among others. Chesbay was one of the first (if not the first) distributor to put in Vertique racks. That puts Reyes at around 105 million cases (including Crest Beverage in San Diego which is a J-V).


DENIED!
September 13, 2012

This certainly is a change of pace. After years of relative quiet from MillerCoors in the wholesaler approval front, it has emerged late last night they have filed a motion in federal court in Virginia to block Reyes Beverage Group's pending purchase of 6 million case Chesbay Distributing Company from the Sampson family. Chesbay operates in Chesapeake, Virginia, carrying MillerCoors, HUSA, Crown Imports, Boston Beer, Pabst, Yuengling and Mike's Hard Lemonade brands among others.

"We are exercising our right of first refusal to purchase Chesbay Distributing in partnership with an entity affiliated with Jeff Honickman because we think it is in the best interest of our brands to do so. Our distributor agreement provides MillerCoors a contractual right of first refusal. We feel strongly about determining the destiny of our brands and feel compelled to fight for our brands. Taking an ownership take in a distributorship is consistent with our Three-Tier System Doctrine provided that brewery ownership is permissible under state law, as is the case in Virginia."

That's a big step from MillerCoors which has more recently, since 2008 really, approved such big distributor consolidations such as Glazer's purcahse of Halo in San Antonio; and now the Mertigage purchase of Columbia in the PacNorwest is also pending. It also introduces a sort-of quasi-branch into Virginia.

Honickman is a partner is several MC distributorships, including being equal partners with Dominic Origlio in Philadelphia, equal partners with Simon Bergson in Manhattan Beer, and partners with both in distributorships in New Hampshire and Arizona (and Origlio in Jersey), and have been longtime Pepsi bottlers in the Northeast. They are also, like the Reyes, well-capitalized.

This seems to be a blow to the Reyes' organization, the largest beer distributorship in the country (not including A-B branches) and certainly MillerCoors' largest at over 100 million cases. Will there be a fight? Stay tuned...


MILLERCOORS: IRREVOCABLE RIGHT OF FIRST REFUSAL
September 13, 2012

In its complaint against Chesbay in blocking their pending sale to Reyes obtained by BBD, MillerCoors points to its distributor agreement (the same agreement the Virginia ABC had trouble with in 2009, see below). Specifically, in arguments to the US District Court for the Eastern District of Virginia, it points to Section 8 which gives MillerCoors the right to approve a buyer and the "irrevocable right and option to purchase that portion of the Distributor's business that is the subject of the Letter of Intent upon those terms and conditions and for the purchase price ... contained in such Letter of Intent..... and assign any or all of its rights.... to a third party of its choosing."

Problem is, MillerCoors says that Chesbay didn't execute a Letter of Intent, but went straight for the Purchase Agreement stage, which said it would exclusively negotiate with Reyes and is binding. MillerCoors says that itself is contrary to their Distributor Agreement, and says Chesbay is therefore in breach of contract. On September 12, MillerCoors exercised its first right of refusal and assigned OHMC, LLC to purchase Chesbay (OHMC being the entity jointly owned by MillerCoors and Jeff Honickman).

MillerCoors seeks a declaratory judgment that it has a "valid and enforceable right of first refusal" and that Chesbay has "breached the Distribution Agreement", calls upon the court to honor MillerCoors' right to "terminate the Distributor Agreement... and be awarded any damages, fees, and costs that it may incur as a result" plus attorney's fees etc.

BACKGROUND:

NOT FIRST RODEO. You will recall that MillerCoors had made a run at keeping Reyes from buying central Florida's blue-silver distributor, Schenck. MillerCoors had tried to cobble together a coalition of groups to negotiate with Schenck after Reyes made it known that it was negotiating with the company. But when it became apparent that no deal would be forthcoming, Schenck was notified by MillerCoors before the deadline that it was free to seek out another deal, and ultimately the Reyes offer stood alone and they closed the deal.

VIRGINIA BACKGROUND. Recall that back in 2009, the Virginia ABC joined regulators in California, Nevada, Texas and Michigan in voicing concerns about certain provisions in MillerCoors new 2008 distributor agreement, which Reyes had famously refused to sign at the time (see BBD 05/21/2009 ). The Virginia ABC sought "assurance from MillerCoors LLC that it will not seek to enforce the provisions of the Distributor Agreement detailed above with respect to Virginia wholesalers." One of the problems Virginia had with the MillerCoors contract involved the the brewery approval process for selling a distributorship. Virginia distributor attorney Walter Marston wrote to distributors at the time that "the VBWA may be able in the future to dialogue with major breweries and obtain informal understandings regarding the application of Virginia law to their distribution agreements. At the very least, major breweries can no longer safely assume that they will not be challenged when they issue one-sided, unreasonable contracts to Virginia beer wholesalers."

FRANCHISE LAW. In any case, Virginia franchise law doesn't allow for brewers to withhold approval "unreasonably", and Virginia law is thought to supersede the Distributor Agreement.

And then you have Chesbay's other major suppliers to consider: Crown Imports, Heineken USA, Boston Beer, Pabst, Yuengling, Mike's, and others. How will they feel being bought out by an entity with an ownership stake -- albeit temporarily -- by MillerCoors?

Also, Virigina does allow a brewery to temporarily own a non-controlling stake in a distributorship, so MillerCoors is qualified to own at least for a while. A source indeed tells BBD that their stake in the Honickman venture in Virginia would be temporary, and that this stake was in response to matching Reyes' offer, which was likely higher than Honickman would prefer to pay alone due to the synergies Reyes could muster having considerable other distributorship assets in the area.

MC GETS TEETH AGAIN. Those 2008 contract days, and the terminations which occurred after the Miller and Coors merger at the time in certain states, created some strain in the system, which has since alleviated. Will Reyes turn and fight? Judging from Virginia franchise law and the VA ABC's public stance, it seems like at first blush they'd have a decent chance in court. We'll see.


BREAKING: CHESBAY FIGHTS BACK
September 18, 2012

After MillerCoors denied Reyes Beverage Group the right to purchase Chesbay Distributing in Virginia and seeks to terminate Chesby due to alleged violations of their distributor agreement (see BBD 09-13-2012), we knew Chesbay would fight back based on Virginia's strong franchise laws, and indeed they have.

First, in a letter to the Virginia Alcohol Beverage Control, Chesbay's counsel Walter Marston writes that MillerCoors' block and delay of the sale to Reyes will "cause extraordinary harm, due to the 'fiscal cliff' that looms on January 1, 2013." (Presumably he's talking about the increase in capital gains tax). Time is of the essence, and the question to Chesbay is: Who can decide the issues on this case more quickly: the VA ABC or the federal court? Remember, MillerCoors' complaint is a simple breach of contract case, which is governed by state law.

"The question facing Chesbay Distributing Company is whether Virginia ABC is capable of resolving the state law issues promptly or whether it would be better to let the federal court decide the state law issues. I am inclined" writes Walter, "to ask the federal court to abstain but expeditious resolution of the issues is important." In other words, if the VA ABC can expedite this case, they can possibly save some time.

So Chesbay has filed a complaint against MillerCoors before the Virginia ABC, which makes several claims:

1. Unreasonable delay. Chesbay says MillerCoors has dragged its feet, and as a result, "a decision is no closer to taking place now than it was on May 3, 2012" when Chesbay submitted notice to MillerCoors of its intent to sell.

2. Failure to comply with mandatory decision standard. Chesbay says MillerCoors uses their distributor agreement (famous Article 8) to "evade the mandate . of the Beer Franchise Act constitutes a violation of that section. A brewery may not seek to override and take hostage the sale process using the devices that MillerCoors has unilaterally created for itself."

3. Illegally exercising authority beyond that conferred by VA franchise law. The Virginia beer code "does not permit a brewery to attempt to gain control of a beer distributor or to attempt to exercise a claimed right to purchase a beer distributor."

4. Attempting to exercise privileges available only to a licensed beer distributor.

Chesbay requests that the agency find that MillerCoors has violated Virginia law for the four top claims.

Here's a timeline of the Chesbay - Reyes deal:

May 3, 2012 - Chesbay gives MillerCoors a notice of intent to sell.

May 10, 2012 - MillerCoors vp distributor and sales services Tim Owston responds and writes that MillerCoors "hereby elects to exercise its right to negotiate exclusively for itself and its future assignees with Chesbay Distributing Company for the purchase of your business", and assigns the right to negotiate with Meritage Group (who has a deal to buy Columbia Distributing).

May 10, 2012 - Chesbay starts negotiating with Meritage, which Chesbay calls "a Connecticut-based investment firm with no prior beer industry experience." The negotiations go on for 90 days.

August 8, 2012 - Chesbay tells MillerCoors that they don't have a deal with Meritage, and then starts negotiations with Reyes. During these negotiations, "MillerCoors proceeded to channel other potential purchasers to Chesbay," which included JJ Taylor and Honickman/Bergson/Origlio. "None of them were able to produce an offer that equaled, much less exceeded, the offer that was on the table from Reyes Holdings."

August 28, 2012 - Chesbay and Reyes execute an Asset Purchase Agreement.

August 30, 2012 - Chesbay notifies Tim Owston that they have concluded successful negotiations with Reyes.

September 6, 2012 - Tim advises Chesbay that it has breached its contract with MillerCoors because it had entered into a binding purchase agreement.

September 12, 2012 - Tim writes a letter to Chesbay that MillerCoors is exercising its right of first refusal and is assigning its purchase right to OHMC LLC, a joint venture between MillerCoors and Honickman/Bergson/Origlio. MillerCoors files suit in federal court alleging breach of contract.


CHESBAY'S DILEMMA
September 20, 2012

Several readers have asked why Chesbay is fighting MillerCoors on the sale of their distributorship when the joint venture approved by MillerCoors is matching Reyes offer? The devil is in the details. One of of the things that complicates matters is that there is no guarantee that other suppliers would approve the deal, particularly if MillerCoors is a partner (even if only for 180 days). In particular, Crown and Yuengling are wild cards in that transaction, we're told. Without Yuengling alone, the deal becomes harder; and if Crown jumps to the A-B distributor -- well -- forget closing before December 31. (Plus Chesbay has signed a binding purchase agreement). So lots of questions remain.


MILLERCOORS GOES NUCLEAR
September 25, 2012

In an amended complaint on the Chesbay lawsuit, MillerCoors has gone rogue and has changed the cut of its jib, as it were, on its rights to choose acquiring distributors. Perhaps recognizing that its original complaint was particularly weak under Virginia franchise law, MillerCoors has amended their suit to widen the net with a more federal focus, and put forth the claim that their federal trademark registrations trump state franchise laws. If they are successful in their arguments, it could change the landscape in brewery approval cases.

Here is the gist of their argument, in four easy steps:

1. TRADEMARK OWNER. First, MillerCoors establishes that they own their brand trademarks and they are licensed to their distributors: "Chesbay's license to use the MillerCoors Trademark Assets in the Licensed Territory is contingent upon Chesbay's compliance with the standards of quality and uniformity that MillerCoors seeks to have associated with the MillerCoors Trademark Assets and the MillerCoors Brands," writes MC in their amended complaint.

2. FEDERAL TRADEMARK LAW. Second, MillerCoors brings up a federal law, the Lanham Act, which prohibits use of trademarks except by the registered owner and related companies where the owner still controls the trademarks. "In fact," says MillerCoors, the Lanham Act "imposes upon MillerCoors an affirmative duty" to control the trademarks.

3. CONTROL OF TRADEMARKS. So.... MillerCoors says that its distributor agreement is the instrument by which it controls its trademarks, and it "retains the contracutal right under its Distributor Agreement to control the quality and uniformity of" the trademarks, and can assign them to whomever they want. Presumably, allowing Reyes to have the trademarks is not an option they covet.

4. MC CAN DECIDE WHO LICENSES TRADEMARK. Therefore..... by signing the distributor agreement (which Chesbay did), Chesbay "acknowledge[d] that the trademarks, trade names, service marks, designs, brand names, labels, promotional slogans, and other trade designations MillerCoors uses in connection with all Products and other products sold or licensed to be sold by MillerCoors are and shall remain the sole and exclusive property of MillerCoors," says MillerCoors, quoting the distributor agreement.

This is a very different case indeed. It's a cut-and-dried federal trademark case, says MillerCoors.

REYES RESPONDS: "CHILLS DOWN YOUR SPINE"

To say that Reyes Holdings is not amused is an understatement. Here is Reyes' response in full:

"MillerCoors yesterday delivered the death knell to every state franchise law across the country. In the opinion of the foreign owned brewery, federal trademark law trumps state franchise laws. Period; end of story. All United States distributors take note: remember those franchise laws that MillerCoors represented you could rely on when you signed the MillerCoors distribution agreement, well apparently MillerCoors didn't really mean it.

"Based on MillerCoors' latest filings in federal court, the brewery believes that, not only can it direct distributors as to when, how, and to whom to sell their businesses, it can control every aspect of a distributor's business as it relates to their products and trademarks, regardless of state laws. The independence of the middle tier is non-existent in the mind of MillerCoors.

"We've listened to MillerCoors pay lip service over the years that it will follow state law if state law conflicts with its distribution contract. Statements to this effect have been made by MillerCoors to state regulators at the highest level, NBWA, state beer wholesaler associations, distributors, distributor attorneys and others.

"But when it's time for MillerCoors to put this into practice, it's a different story. Chesbay is simply following Virginia law and attempting to maximize the value of its business, which it has spent decades developing. After several MillerCoors anointed potential purchasers failed to offer a sufficient purchase price for its business, Chesbay negotiated and agreed on a deal to sell to Reyes Holdings. Apparently MillerCoors doesn't like that and wants to pretend that those state laws don't exist.

"If MillerCoors won't accept the fact that sections of its one-sided distribution agreement are unenforceable, and that state laws ultimately govern the relationship between suppliers and distributors, then it's time for a court to tell them so.

"We suggest that state ABC regulators and beer wholesaler associations, as well as others charged with upholding state laws and the 21st amendment, read MillerCoors' complaint. It should send chills down your spine."

MILLERCOORS RESPONDS TO CHESBAY SITUATION
September 26, 2012

MillerCoors last night responded to the reports of their amended lawsuit blocking the sale of Chesbay to Reyes. In their communique to distributors jointly from Tom Long and Ed McBrien, they make the argument that their amended complaint defending their trademarks is nothing new and is not an attack on franchise laws, and they suggest that it is the trade press which has stirred the pot.

I am reprinting it in its entirety:

"Based on the tone of recent trade media coverage, we wanted to quickly provide MillerCoors distributors with further context surrounding our decision to exercise our contractual right of first refusal relative to the proposed sale of Chesbay Distributing. Contrary to the picture being painted by advocates in the press, this is not an attack on state franchise laws. Rather, it is about protecting MillerCoors ability to match an offer from another purchaser and assign the right to purchase to its preferred buyer - in this case, a licensed wholesaler handling MillerCoors and other supplier brands in multiple territories. Importantly, this assignment keeps the seller whole, while at the same time protecting MillerCoors' brand trademark rights. This is nothing new. In fact, MillerCoors has long sought to protect its valuable brand equity through a balanced interpretation of state and federal law and our distributor contract. MillerCoors has gone to federal court to confirm that this right is consistent with Virginia law as well as MillerCoors ability to protect our brands. State franchise laws were developed to protect the value of distributors' existing businesses, especially when they choose to sell. They were not designed to guarantee the rights of buyers."

So MillerCoors is pointing out that while they are using federal trademark law to attempt to block the sale to Reyes, the end result doesn't change the value Chesbay gets for its business. This is true, as the MillerCoors/Honickman Group must match Reyes' offer. Although we note it puts Chesbay in a bind, as while they would theoretically get the same value for their business, they are still caught up in a legally binding purchase agreement with Reyes. Plus, there are the other suppliers that add complexity to the situation.

Regardless, distributors wrote and spoke to BBD in droves yesterday afternoon -- importantly before MillerCoors' memo was sent we should stress -- with nearly all distributors sympathetic to Chesbay and Reyes -- even A-B distributors. I would say that the prevailing sentiment isn't so much anger as it is disappointment. While I can't print all of your thoughts, I have picked a few that were representative of the whole.

Truth Squaders speaketh:

"NBWA is puzzled that MillerCoors is seeking to federally preempt state beer franchise law in its lawsuit against Chesbay Distributing. MC's desperate challenge contradicts its repeated public support for independent distributors, the three tier system and state alcohol regulation. Pursuit of this strategy is destructive to industry relations and, if successful, would be devastating to the independent beer distribution industry." -Craig Purser, National Beer Wholesalers Association

"There will surely be a response from MillerCoors clarifying their position, but I have to substantially agree with the Reyes statement for now. What value is the Distributor Agreement if this option is in place? Our state franchise law only requires that a Brewer sell us product, and that we purchase it to qualify the relationship between Brewer and Wholesaler. Might as well not sign the one-sided agreement if it doesn't mean anything. Reminds me of our current President who seems to find a way around the legislative process through Executive Order." -A. Distributor

"I am fairly young, (46), but I have already figured out in life, that a smile and a handshake promise are worthless when dealing with these big guys. Reyes is absolutely correct in their statements. However, MOST of these distributors let MC bully them into signing the agreement. So I guess if you sign it you deserve the repercussions. On the flip side, I do understand MC 'owning' their brands." -An A-B Distributor

"We are one of few that didn't sign the MillerCoors contract. Shame on the so-called distributor council for rubber stamping this thing!" -A. Distributor

"I think it's crazy what's MillerCoors is doing. Are they insane? Instead of selling beer, distributors will be obsessing about this for the rest of the year." -A. Distributor

"I bet AB is happy about this. Let MC do the heavy lifting. And AB isn't the bad guy for once." -A. Distributor

"It's desperation. They are losing share, and AB has the scale to pound them. So instead of blaming themselves, which would put them out of a job, they are turning on their distributors. Might as well blame the retailers too while you're at it but oh wait, they have negative leverage over retailers. So distributors it is! Therefore they believe that by totally having the ability to restructure their distributor network somehow that will translate into a turnaround. News flash: Fix your brands, fix your marketing, establish healthy margins on the back of AB's price increases, get your distributors back on your side, be the anti-AB (like I had thought you were doing) and sales will follow - and it won't matter a hill of beans who is selling your brands in Virginia or anywhere else. Yes, even private equity funds in the Pac Norwest with no experience in the beer business will be able to increase your sales. Just my fifty cents Harry, which will get you a Mr Pibb and a free donut at our local cstore." -A. Distributor

"Screw Reyes Wholesale. MC thinks they have gotten too big and are pulling out all the stops to stop them. I say GOOD!" -A. Distributor

"On the surface, this appears to be a last-ditch effort on MillerCoors' part.... Unfortunately for MillerCoors, there will be long-term unintended (or so I so righteously believe they are unintended) consequences within their distributor system. As proud as I felt when MillerCoors penned their 'Three Tier Doctrine', I feel doubly embarrassed by this desperate amended complaint in their lawsuit vs Chesbay. All trust and confidence in the MillerCoors leadership has vanished. How unfortunate that in their zeal to preclude the Reyes/Chesbay deal, MillerCoors alienated their entire network - both the buyers & the sellers." -A. Distributor

After reading MillerCoors' rebuttal, have your opinions changed? Should a brewer get to use whatever legal methods available to get to choose a buyer? It's a legitimate question. Has the trade press created a tempest in a teapot?

WHAT WE'RE HEARING. Let us put aside whether MillerCoors' legal argument that federal trademark law preempts state law or not. From what I understand from conversations and email exchanges I've had, here are the two irreconcilable issues that distributors are mostly talking about:

1. The Virginia franchise law clearly states that: "No brewery shall unreasonably withhold or delay consent to any transfer of the wholesaler's business, or transfer of the stock or other interest in the wholesalership, whenever the wholesaler to be substituted meets the material and reasonable qualifications and standards required of its wholesalers." The intent of that law is pretty darn clear. Reyes is clearly qualified to be a beer wholesaler for MillerCoors, since they are, after all, its largest.

2. Back in 2009 when MillerCoors was trying to get its distributors to sign its Distributor Agreement, they repeatedly assured distributors that they needn't worry about any measures in the contract which conflicted with state law, because when in doubt, state franchise law superseded the distributor agreement.

In fact, in the June 19, 2009 issue of Beer Business Daily, we reported that MillerCoors sales president Ed McBrien wrote to their California distributors (after a dispute with the CBBD over an AG letter) that: "We have said clearly and repeatedly that state law enjoys primacy over the terms of our agreement and that state law will prevail in the event of any conflict." Some distributors even added an addendum to their contracts before signing declaring this, although there's a question as to whether that would hold up in court.

BOTTOM LINE. Distributors see the inherent conflict between points 1 and 2 above in this amended Chesbay lawsuit, and that is the source of the head scratching and hand wringing. "We all signed the agreement believing that the brewery would keep their word that the fair dealing law was the gold standard," said one prominent distributor in an email last night. "I feel like a chump."

BEERNET EXTRA:

To read MillerCoors' amended complaint, click here: https://docs.google.com/open?id=0B_AxpKotj17vVjNRSGpNT1NGeTA

The June 16, 2009 story in BBD regarding the contract in California: http://beernet.com/publications_daily.php?id=1799

To read a story I wrote way back in 2003 about, interestingly enough, Chesbay and Reyes on warehouse efficiency, click here: http://www.beernet.com/publications_daily.php?id=2767


The Readers Speak
FILED SEPTEMBER 27, 2012

Dear Client:

There are a lot of opinions on the Chesbay lawsuit. So many, in fact, that it was tough to narrow it down. But after MillerCoors' statement yesterday, we did get a few emails from distributors which were supportive of MC. While the vast majority of emails were sympathetic to Chesbay, we are including all of the emails in favor of MC.

The Truth Squad Speaketh:

"Harry, it's not about Reyes. Chesbay believed they were complying with the MC contract given state law and MC's repeated public statements about state law. MC puts at risk additional supplier approvals (like Yuenling) and makes us think 'if they will do this to their largest customer, they can do this to me'." -A Distributor

"Pretty clear to me that MC doesn't want Reyes as their distributor, it is that simple.... Reyes generally gets high marks for efficiency, cost savings, and profitability, but those things often fly in the face of brand building, brand investment, and positive relationships with retailers. Because of the their approach they can justify paying more for Distribs businesses because they simply do not run them to build brands rather to simply make money. They seem to act like bullies especially when it comes to MC does the 'Reyes Model' work for the rest of us distributors? If every distributor operated like Reyes would there me more calls for the elimination of the middle tier? Not sure but stay tuned we are likely to find out someday." -A. Distributor

"I can't help but wonder why Miller Coors would pick this battle ground to take on Reyes. They are a strong player in this part of the country already, and the fallout of losing the PR War, which is what this will turn into, will have long term effects on their distributor network. We have enough enemies at the gate trying tear down this great industry...ie neo-prohibitionists, mis-informed regulators and competitive spirits/wine companies. This type of in-tier fighting is never good for anyone and will surely have negative repercussions in the future." -A. Distributor

"We know what MC said before and what they are saying now. So no, I have no trust or faith in the letter sent out to MC wholesalers. MC helped to foster these mammoth wholesalers and now they are paying the price. Large wholesalers are not the solution for MC." -A. Distributor

"Harry, I never want to leave the business, but if I do I strongly believe MC should be able to pick my successor. I would be gone and they have to live with whoever buys me. As long as I get fair value it should be their choice. Chesbay should take its money from MC and be satisfied." -A. Distributor

"Harry, I dare you to run this. The old legacy Coors guys don't like Reyes, plane and simple..... Let Rome burn in order to get one medium sized wholesaler in Virginia.. Wow who's the genius who thought of that? Absolutely nobody is selling MC beer right now, it's all about suppliers that support us ie in our case HUSA/Pabst/Crown/Mike's/craft." -A. Distributor

"There's a simple solution. Have Reyes purchase all of Chesbay except MC brands and see how long a MC only Distributor that paid top dollar last in the market. Then Reyes can buy it for pennies on the dollar." -A. non-preferred, non consolidated distributor



MillerCoors Chief Tom Long Responds to Chesbay Ordeal
FILED SEPTEMBER 28, 2012

Dear Client:

It was just four years ago when the newly created MillerCoors found itself in a huge controversy with its distributors over its new contract.

This fall, the brewer finds itself in another fracas as it has invoked federal trademark law to block Reyes Holdings - its largest wholesaler and a larger business than MillerCoors itself - from acquiring Chesbay in Virginia.

As you can imagine, I've received a tremendous amount of mail on this burning topic, and opinions break into two camps: One group sees this as an attack on the three-tier system. A smaller group sees this controversy as essentially boiling down to MillerCoors trying to draw a line in the sand with Reyes.

"What is MillerCoors thinking?" one distributor asked us. We thought that was a fair question so we sat down with MillerCoors chief Tom Long to get at the heart of the matter. You, my friends, are a fly on the wall.

HARRY: Tom, thanks for taking the time. We might as well tackle the elephant in the room. It's no secret that MillerCoors' relationship with your biggest distributor, Reyes Holdings, is sometimes strained. Some distributors are saying this whole fight is about you trying to prevent Reyes from getting bigger. Is that true?

TOM LONG: We have a solid relationship and an ongoing dialogue with Reyes Holdings. We disagree on some issues that both teams see as important. But it's not personal. Let me say upfront we appreciate their business and I believe we both want to prosper together. That's how both companies have become so successful. But it's really pretty simple ... they want to grow new territory with our brands and others unconstrained by performance requirements or by signing our contract and we think that's important. We know we have a shared accountability for performance, and of course it's a two-way street. And we have lots of very big distributors who we grow with, and plan to grow with, and it works fine. And Reyes has big suppliers they work fine with too. On Chesbay, things didn't come together.

HS: Can you elaborate on that a bit?

TL: I'm not going to share private conversations, but it's fair to say in these sorts of transactions we want a commitment to certain performance standards, including small-store service levels. And as a rule we want distributors to service the entire territory, not just the accounts with the best economics. We want reasonable access to our brands for all licensed accounts, which I think is a fair expectation for any DSD supplier in any DSD industry. That's fundamentally why DSD crushes warehouse. It's not just the big accounts Harry, it's up and down the street.

One of your readers summed it up very nicely yesterday saying "I strongly believe MC should be able to pick my successor. I would be gone and they have to live with whoever buys me." Doesn't that sound reasonable?

HS: Reyes has famously not signed the MillerCoors contract you rolled out several years ago. Is that a factor here?

TL: All other aligned distributors whom we support for territory growth have signed it and it's nearly 90 percent of our system. And things have gone really smoothly since then by all accounts. And distributor valuations have continued to explode, contrary to the naysayers back then.

HS: Some people say this is about MC trying to prevent Reyes from getting any larger. Is that true?

TL: Well, we are concerned about keeping the model local for all kinds of reasons. But in this case the answer is no. Because there are pretty simple conditions under which we would approve expansion. We have communicated that and the conditions are consistent with our expectations of any distributor. We need to make sure we have shared principles, are tracking the same things and are strategically aligned as we go to market.

We don't have an arbitrary cap on size. But at the same time we don't want to go from a world where we have 500 to only 15 or 20 distributors. I'm sure everyone thinks that's way too few! Our business was built by distributors with a local touch who service every account like it mattered. That local touch still matters and if we go to a world where we have 15-20 distributors I can categorically say that we will lose our industry if it goes that far.

Look no further than soft drinks.

HS: Now, your amended complaint invoking federal trademark law as superseding state franchise laws certainly got everyone's attention. Can you elaborate on your reasoning?

TL: I can tell you, unequivocally, that it was not an attack on state franchise laws. Rather, it is about us trying to protect the value of our brands by making sure we're partnering with the distributor we believe best suited to that market and our brands under current conditions.

Because at the end of the day, Harry, the beer business is about brands and its health and profitability demands that we have strong brands. As a supplier, it's our job to bring great brands and invest billions of dollars on marketing and sales initiatives to make sure those brands are as strong as they can be.

And it works great most of the time.

HS: So are you walking away from the Three-Tier System Doctrine?

TL: No, and I'd like to get real clear on what the Three-Tier System Doctrine says and does not say. The Three-Tier System Doctrine clearly states our position that MillerCoors believes the three-tier system of production, distribution and retail sale is the most powerful route to market for our brands. Additionally, the doctrine speaks out specifically about the balance needed in federal and state law as it applies to our businesses. It does not say that we would never have disagreements with our distributors. It does not say that state laws mean whatever a distributor may want them to mean. It does not say we would not protect our interests - and our system's interests - within the context of the three-tier system when we believe those interests are being undermined.

Our actions honor those principles and commitments and the facts of this case are unique to this particular transaction. Our position does not threaten the three-tier system. Rather, we seek to maintain the appropriate balance between the tiers so we can ensure that our brands continue to grow to the benefit of both us and our distributors.

HS: Some distributors fear that if you prevail on the trademark issue, you will suck a lot of value out of the system. Is that true?

TL: Actually Harry, the exact opposite is true. If we lose control of our brands, we can't build their value and ubiquity, which in turn builds the value of a distributor's business. We just want to protect our ability to match an offer from another purchaser and assign the right to someone who'll help us build brands locally. The seller has to be kept whole. We get that. That's table stakes. But we need to keep our brands whole too. Our company value depends on our brand value too. Just like distributors trade on the brand franchise and equity value, so do we.

HS: What do you say to distributors who say you've violated their trust?

TL: We have fought hard and fairly for our distributors because it's good business. And they do the same for us. Almost universally. We've given up our rights to own distributorships long term in several states and been clear that even here at Chesbay, we are temporary minority owners. It's commitment, not competition. That's not going away. But it's a two-way street.

In fact, just in the last few years we have demonstrated that commitment through actions that hurt our pocketbook short term and benefited our distributors, like moving to 70/30 on price promotion, a move aimed at building alignment and trust. To my knowledge, nobody else followed. At the urging of our National Distributor Council, we revised the freight and fuel model, taking more forward fuel risk. And, we penned the Three-Tier System Doctrine and stand by the spirit and letter of that document.

We know we need to get the focus back on selling great beers and we don't like this distraction one bit, but it's a necessary business decision to protect our rights as brand owners.

We hope to return the dialogue back to selling beer next week when we kick off our fall meetings. We're going to be previewing our sales and marketing and innovation plans for the balance of the year and 2013. We think we have a strong show and some strong work.
We're very cognizant of the fact that if we ask high standards of our distributors, we must set high standards for ourselves.

HS: Thanks Tom for your time.

DISTRIBUTOR STATE ASSOCIATION COMES OUT BLASTING AGAINST LAWSUIT

Eric Criss, the president of the Beer Industry of Florida, links the lawsuit against Chesbay by MillerCoors to the general deregulation in press release issued last night. Recall that Reyes is a member of both the Beer Industry of Florida (blue-silver network) and the Florida Beer Wholesalers Association (red network).

"Beer distributors strongly support laws which preserve America's state-based system of alcohol regulation," he writes. Eric says this system is "acclaimed by public health experts worldwide" and that state franchise law a "critical component of the three-tier system in dozens of states across the nation. They are proving to be one of the few remaining protections for local, family-owned, beer distributors against the undue influence of foreign-owned, mega-brewers who control 80 percent of the world beer market." Pointing to recent press reports of minors buying alcohol in the internet, Eric encourages "companies engaged in the production and sale of alcohol to stop the endless line of lawsuits designed to tear down the system of alcohol regulation that protects our children and our communities. Specifically, we call on MillerCoors to drop its lawsuit against Chesbay Distributing and end its unwarranted attack on family-owned distributorships."



Texas Weighs In
FILED SEPTEMBER 30, 2012

Dear Client:

Last week it was the Florida wholesalers, now the Texas beer wholesalers have issued a release calling on MillerCoors to drop its lawsuit, saying it is "extremely disappointed" and also invokes the "foreign-owned" angle.

The release, by Wholesale Beer Distributors of Texas chief counsel Keith Strama, goes on to say: "The argument presented by MillerCoors has been rejected repeatedly by federal courts in multiple jurisdictions. Nevertheless, MillerCoors chose to move forward with a discredited legal argument which, if upheld, would destroy the value of hundreds of family owned businesses throughout the Country.

"It is time for MillerCoors to prove that it truly values its relationship with its brand distributors and unequivocally acknowledge the validity of state franchise laws. The Wholesale Beer Distributors of Texas call on MillerCoors to immediately withdraw its challenge to the Virginia franchise law. Failure to do so will only substantiate concerns that the new foreign ownership of these iconic American brands seeks to export its model of vertical monopolies to the United States and take without compensation billions of dollars in jobs and wealth from American families. Beer distributors are confident that the American courts will reject the renewed efforts of the foreign breweries and that the bi-partisan coalition of American leaders who have fought over many decades to preserve the independent American three-tier system will continue to strengthen the existing regulatory system."

NBWA TO MEMBERS: "VERY CONCERNED"

Also on Friday, the NBWA sent a memo to distributors saying it is concerned that "MillerCoors is attempting to preempt state franchise laws" and attempting to "call into question the legitimacy of a state's beer franchise law." If MillerCoors is successful in using the Lanham Act trademark argument, says NBWA, it "could be very detrimental to the independent beer distribution system."

The day the new lawsuit was filed in federal court, NBWA issued a statement, saying:

"NBWA is puzzled that MillerCoors is seeking to federally preempt state beer franchise law in its lawsuit against Chesbay Distributing. MC's desperate challenge contradicts its repeated public support for independent distributors, the three-tier system and state alcohol regulation. Pursuit of this strategy is destructive to industry relations and, if successful, would be devastating to the independent beer distribution industry."

NBWA also says that MillerCoors' legal strategy is "wildly ambitious" and is a long shot because the Lanham Act has never been "held to limit state law in this way."

In NBWA's legal blog, alcohollawreview.com, counsel Paul Pisano writes that MC tries "to have it both ways on its controversial proposed supplier agreement." While MC execs said that state law prevails when there's a conflict with the contract, they also "make the argument . which contradicts those pronouncements and have in other forums tried to deflect attention to how the proposed supplier agreement violates state law. Past adjudications have not been favorably inclined to support the MillerCoors attempts to remain selectively vague, for example here is a ruling in Michigan disagreeing with the MillerCoors view on how the contract attempted to treat the sale of a distributorship."



MILLERCOORS MAKES ITS CASE: VIRGINIA CASE NOT A THREAT TO THREE-TIER

FILED OCTOBER 1, 2012

In a note to distributors late last night, MillerCoors chief Tom Long set forth a document which seeks to make the argument that their actions in Virginia are not contrary to the tenets they set forth in their Three-Tier System Doctrine of 2010.

That Three-Tier Doctrine, says Tom, was crafted in order to "encourage renewed distributor confidence in the future integrity and investment potential of the three-tier system; (2) to affirm MillerCoors and its distributors' shared commitment to the three-tier system and shared belief that this system is integral to their mutual success; (3) to identify those aspects of the three-tier system that are the most important to MillerCoors and its distributors; and (4) to set forth those actions that MillerCoors and its distributors will take to preserve, defend and support the three-tier system."

Tom says that their actions in Virginia support all of those commitments. How? Here's what Tom writes:

"Virginia law and our right of first refusal work together to balance and protect both distributor and brewer rights and interests. Virginia law protects the rights of existing distributors, not prospective purchasers, and our right of first refusal protects our right to pick our distributors. Both work together to promote the three-tier system by protecting the selling distributor's right to receive full value when it transfers its distributorship, while also protecting the right of MillerCoors to ensure the most effective distribution of its brands. State laws around distributor transfers, like those in Virginia, regulate how a brewer exercises its right of approval, not whether it has one in the first place. This protects distributors from bringing forward one purchaser after another to a brewer, only to have the brewer say 'no' every time.

"That is not the case with Chesbay. We have offered Chesbay a strong alternative buyer that makes the seller whole. As long as Chesbay gets its value, the equities weigh in MillerCoors favor to determine who will sell our brands going forward.

"There is a role for federal law in this debate - and that protection comes through the Lanham Act . [Emphasis ours]. Our decision to invoke the Lanham Act is not about seeking to preempt state law, but rather about our trademark rights and how those rights need to be considered when interpreting state law. Allowing a selling distributor to transfer the license to use our brand trademarks to a third party without the consent of the very entity who owns the brands in the first place undermines the value of brands that we and our distributors have worked so hard to enhance. It's wrong - for us and for the system. Protecting our brand equity and who manages it on a local basis is vital to MillerCoors and to our entire system. The Lanham Act recognizes this right to protect brand equity, and that is why we included the Lanham Act claims. We think they help to solidify our interpretation of Virginia law and the legitimacy of our right of first refusal.

"Our arguments in this case are absolutely consistent with the 21st Amendment. We have consistently stated that there must be a balance between state and federal law, and this case is no different. The Lanham Act claim only applies if the federal court says state law deprives MillerCoors of the ability to have meaningful say in who purchases distribution rights to our brands. This is clearly within the framework of the 21st Amendment, and it protects the legitimacy and importance of the three-tier system. The 21st Amendment does not empower states to dictate to brewers how they should handle their own assets, their own brands and their own intellectual property, and it does not block the brewer's effort to get the best, most competitive distributor in each territory. This case embodies that fact.

"Our actions and arguments are completely consistent with and promote the Three-Tier System Doctrine. The first sentence of the Doctrine is clear: Its purpose 'is to define a clear and enduring set of shared beliefs, principles and commitments related to the existing structure and value of the three-tier system.' Nothing would undermine the value of the system faster than us being deprived of the ability to determine who will represent our brands in a local area. And none of the issues in the Chesbay lawsuit will impact the traditional route-to-market pathway, nor should it. We do not - nor would we ever - claim state three-tier system laws supporting separation between the tiers should be preempted by federal trademark law, or that federal law requires a different type of distribution system. We stand behind the three-tier system as resolutely as ever. And as the Doctrine states, we will always use 'appropriate federal and state authority to protect the interests of both national and local businesses to effectively operate across their respective territories.'

"Our actions emphasize the importance of our written Distributor Agreement. Our contracts with our distributors underpin our distributor's business value, putting in writing their distribution rights; strong, well-known trademarks; exclusive territories; rigorous performance expectations; and quality control standards. The value and viability of the three-tier system would be undermined if a selling distributor were allowed all of the benefits of the agreement, but not be held to the obligations. A balanced approach provides value to everyone - brewer, distributor, retailer and consumer."

What do you think? Does a "balanced approach" provide value to both distributors and brewers, or does a stronger middle tier save suppliers from themselves?

I know what state association execs think . In fact, after Florida and Texas, we got letters supporting Chesbay from Maryland, Illinois, both associations in Florida, the Washington DC distributor association, California, Pennsy, and more to come (see below). I've never seen state associations come out in force for one issue in a long time (except the Care Act). I think this is a fight of ideology that suppliers and distributors will be fighting for some time, because it's really not about Reyes or Virginia law, it's about what rights accrue to whom between suppliers and distributors. Distributors currently hold the stroke at the state level, brewers at the federal/judicial level. The tension will remain between those two.

WHERE ARE OTHER SUPPLIERS?

The other brewers/importers have remained largely quiet on this issue, happy to let their competitor MillerCoors take the heat. But in my private conversations with them, several have expressed sympathy for MillerCoors, with many expressing their belief that brewers should indeed have the final decision on who their brands are sold to in a market, and many others lamenting what they call the "one-sidedness" of franchise laws in some states.

One of those suppliers called the foreign-owned argument a "slippery slope" pointing out that distributors' value is partially derived from foreign-owned imports, and it leaves the industry open for taxation which hurts demand. "Welcome to 2012 -- it's a global market," he added. He pointed out that Reyes does business in South America and is twice the size of MillerCoors. "My concern is that wholesalers don't have much behind their argument beyond a protectionist strategy. Brand trademarks are most definitely brewer property and should be regulated at the federal level or we become - India," said this supplier on condition of anonymity. (Ed. Note: Nobody wants to go on record -- it's a testament to how suppliers truly do want distributors to like them).

BEERNET EXTRA:

Here are the letters distributor associations sent regarding the MillerCoors / Chesbay lawsuit:

Associated Beer Distributors of Illinois letter: https://docs.google.com/open?id=0B_AxpKotj17vX0d6c1NNR1NWNmM

District of Columbia Wholesalers Letter: https://docs.google.com/open?id=0B_AxpKotj17vYTh4NTNYSzMweUk

The Beer Industry of Florida letter: https://docs.google.com/open?id=0B_AxpKotj17vQkVBeDYzVmh5em8

Florida Beer Wholesalers Association letter: https://docs.google.com/open?id=0B_AxpKotj17vMTJYMHUzbndKdUU

Maryland Beer Wholesalers Association letter: https://docs.google.com/open?id=0B_AxpKotj17vU3RDR21BN2RpbXc

Pennsylvania Letter: https://docs.google.com/open?id=0B_AxpKotj17vQ3J1ZWpzVWt4aDQ

Texas WBDT Distributor Letter: https://docs.google.com/open?id=0B_AxpKotj17vU0NqOVpxQjEyTFU

Virginia letter to other state association execs: https://docs.google.com/open?id=0B_AxpKotj17vQndETlBROENOUlU

California Beer and Beverage Distributors letter:
https://docs.google.com/open?id=0B_AxpKotj17vMG1FdWptVmdMazg

MillerCoors Three-Tier Doctrine: https://docs.google.com/open?id=0B_AxpKotj17vQ3liTTNOQzJFUlU



BREAKING: Gloves Off! Reyes Responds
FILED OCTOBER 2, 2012

Dear Client:

Citing the old Danish fairy tale, "The Emperor's New Clothes", Reyes Holdings issued a blistering rebuttal to MillerCoors' memo to distributors, (Promoting the Three-Tier System Doctrine). Writes Reyes: "After years of listening to MillerCoors' propaganda that state laws will be respected and followed, it is time for all MillerCoors distributors to announce: 'But the emperor has no clothes!'"

Sidebar: All this on the eve of MillerCoors distributor meetings, which start in Chicago tomorrow. MillerCoors was set to unveil new stricter operating standards at the regional meetings, but the Distributor Council and the brewer could not agree on how strict, according to sources.

Continues Reyes:

"Reyes began business in 1976 as a small beer distribution business in Spartanburg, South Carolina. We have never forgotten our roots, or that our story could only be possible in this great nation of ours. We have lived the American dream, selling America's beverage. But we now live in a world where foreign mega-conglomerate brewers care little for American values or laws -- they're just here to suck our hard-earned value out of our family-owned businesses. Friends, this is a cautionary tale, one worth your careful attention.

"In 2008, MillerCoors asked its distributors across the country to sign a new distribution agreement, which included an array of onerous, one-sided terms. Facing regulatory scrutiny, plummeting sales, and a tidal wave of industry criticism over the new distribution agreement, MillerCoors promised Virginia regulators and distributors, and state agencies and all distributors across the country, that it did not intend to, and would not, violate or ignore state laws. To the contrary, MillerCoors repeatedly represented (under oath, in some states) that any state law would prevail in the event of a conflict with any contract. Tom Long stated that MillerCoors 'repeatedly' had assured distributors and regulators that state law applies 'in all aspects governing the agreement.' In Virginia specifically, MillerCoors told the ABC that 'if any provision of the MillerCoors agreement conflicts with Virginia law, Virginia law supersedes the agreement and controls.'

"It is impossible to reconcile MillerCoors' court filing in Virginia attempting to block Reyes' signed deal with Chesbay with these promises. To the contrary, we now know that MillerCoors never intended to honor state laws that ensure separation of the tiers and that protect distributor value, enacted pursuant to the 21st Amendment. Instead, MillerCoors mounts an assault on what the US Supreme Court recently called the 'unquestionably legitimate' three-tier system of alcohol distribution, not just in the Commonwealth of Virginia but throughout the United States. MillerCoors' agenda is clear. It aims to seize control over, and convert for itself the value from, its vast nation-wide distribution network.

"Let's be clear about the purported basis for this unprecedented land grab. MillerCoors attempts to block the Reyes/Chesbay deal because it says that Reyes will not 'protect MillerCoors trademarks.' Yet Reyes has distributed beer in Virginia since 1988. It operates Premium Distributors of Virginia, which distributes MillerCoors and other brands in Virginia pursuant to trademark protections very similar to those in the Chesbay MillerCoors contract (which state law requires Reyes to adopt in its entirety when the deal closes). At the MillerCoors National Convention in March 2012, Premium received the Bill Coors Award for obtaining the best quality assurance score of any MillerCoors distributor in the nation. In the last twelve months alone, Reyes has distributed the equivalent of 48 million 12-ounce cans of MillerCoors product (including over 6 million in Virginia) and acquired another Virginia distributor with MillerCoors' consent.

"In not one instance-in the last year, or ever-has MillerCoors so much as suggested that Reyes did not adequately protect the MillerCoors trademarks. The MillerCoors lawsuit has nothing to do with trademarks. It amounts to a foreign invasion of our laws and our values and yes, our US Constitution.

"We appreciate the incredible outpouring of support over the past several days and we promise you one thing above all else: with your continued support, we will not let MillerCoors take our business, or yours."

Wow. The debate is heating up. What's your take?

Until tomorrow, Harry

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