A-B Makes Case in Illinois
MillerCoors Makes Case in Virginia

FILED OCTOBER 2, 2012

Dear Client:

The irony isn't lost on me that the nation's two largest brewers are currently fighting high profile state laws regarding ownership stakes in distributorships. Both seem to be going poorly. But with the government, you never know until the final decision is handed down, so let us be diligent in reviewing the facts.

CITY BEVERAGE AND A-B. Remember A-B and the state of Illinois? Yep, they're still fighting over whether A-B can own a stake or all of City Beverage in Chicagoland.

The Illinois Liquor Control Commission held a hearing yesterday on that very matter. Recall that A-B says it can be both a brewer and a distributor but the Commission's legal division has said this violates the Illinois alcohol code. After reading countless briefs (which we've read -- snore) and hearing hours of testimony yesterday, the Commish is taking the matter "under advisement" and will render a decision in its good time. No idea when that will be. Basically, A-B says that the Commish's legal advisors are wrong in denying the license because, after all, A-B has had a license there for 30 years. There's a lot more legal wrangling, but that's the gist of the matter.

"If ABI was allowed to own distributorships, craft brewers, new imported brands, and new domestic brands would have reduced access to market. Independent distributors provide an avenue for those products to reach consumers that brewery-owned distributors won't provide," said Bill Olson, president of Associated Beer Distributors of Illinois last night.

It is expected that A-B will challenge the ruling if the Commission revokes their distributor license, so this ain't near over. "Since ABI is expected to file suit challenging such a determination by the Commission to revoke their license, there is no reason to grant an exception to City Beverage to stay a revocation if ABI has any direct or indirect ownership interest. It is inconceivable that City Beverage would be unable to find a buyer," continued Bill.

RECAP OF WHAT'S HAPPENED SO FAR. Okay. This fight has been going on for two years, and even I am fuzzy on what's happened, so let's recap. Back in 2010 (see BBD 03-02-2010 ) A-B had asked the Commish to transfer the licenses of City Beverage to A-B as part of the purchase. In mid-March of that year the Commish ruled that A-B couldn't have the license because they are an out-of-state brewer, and Illinois law doesn't allow out-of-state brewers to be distributors. That caused a Granholm-sian response from A-B (see BBD 03-11-2010 ), with them saying the Commish's ruling violated the Commerce Clause by permitting in-state brewers to obtain a distributor license while prohibiting out-of-state brewers to do the same. The complaint further stated that the Commission interfered with A-B's contract to purchase City Beverage, and it did not interpret Illinois' alcohol code correctly or fairly.

Then, in early September of 2010 (see BBD 09-03-2010 ), a federal district court in Illinois has ruled that the Illinois law is unconstitutional under Granholm. However, Judge Dow leveled down: He denied A-B's "request to remedy the unconstitutionality of Illinois' system by extending the self-distribution privilege to out-of-state brewers." He continued, "That remedy would be more disruptive to the existing statutory and regulatory scheme than the alternative remedy of withdrawing the self-distribution privilege from in-state brewers." He stayed his opinion until March 31, 2011, "...in recognition of the General Assembly's ultimate authority over Illinois public policy, including a remedy for the constitutional defect ...."

So then we have the legislation. Illinois state Senate bill SB 754, which amends the Illinois Liquor Control Act of 1934 to define craft brewers as those that make less than 15,000 barrels per year and allows them to distribute up to 7,500 barrels of their own beer (see BBD 05-24-2011 ), passed both houses. It also prevented larger brewers from doing the same. On May 23, 2011, during legislative debate, House sponsor Rep. Frank Mautino said, "In other words, all brewers, in-state and out-of-state, manufacturing beer above the craft brewer limits may not self distribute or own a distributorship in Illinois." The bill passed and became law on June 1, 2011.

In May 2012, the Commish issued "findings" which were clear as mud. But basically, the Commish found that A-B couldn't hold the licenses. (see BBD May 14, 2012).

On June 7, 2012, the Commish asked City Beverage to appear and asked why each license "should not be fined, suspended or revoked for a violation of the Illinois Liquor Control Act...." The citation further indicated that the Legal Division of the Illinois Liquor Control Commission recommended "that the City Beverage ... licenses be revoked and that the revocation be stayed pending the divestiture of ownership interests of Anheuser Busch, LLC and its affiliates from City Beverage...."

And that brings us to today. "Beer distributorships, independent businesses in the three-tier regulatory system, play a vital role in controlling how alcohol enters Illinois, facilitate the collection of taxes, and assure that alcohol is sold only to licensed retailers," said Bill. "These independent distributors create competition, are easy to regulate, and are a vital part of the local communities they service." [Ed. Note: Thanks to Carol Shirley for helping me get our chronology straight].



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

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

Until tomorrow, Harry


"Facts do not cease to exist because they are ignored."
-Aldous Huxley

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