MOST STATES LIKELY REQUIRE PROMPT ACTION TO TERMINATE FOR CAUSE The franchise laws of many states with respect to beer require a brewer to take quick action if it is going to terminate its distributor for cause. For example, South Dakota provides that a beer distributor must be informed of its shortcomings within two years of the brewer learning of the problem in order for the brewer to have cause to terminate the agreement. While we are not aware of a specific state regulatory scheme that imposes such a requirement with respect to termination of a spirits distributor, the general legal principle here likely applies. The applicable legal doctrine is known as laches, which is generally applicable to contract disputes. Essentially, the doctrine holds that if a party to a contract breaches the contract, and the other party doesn’t complain about the breach within a reasonable period of time after discovering the problem, then the non-breaching party has waived the breach. Some form of the laches doctrine is in place in almost every state. So a brand that is internally complaining about difficulty with its distributor should make sure to voice those concerns with the distributor itself — and take appropriate legal action — in order to keep from waiving its rights.
SO WHAT TO DO? Rounding back to our marriage metaphor, brands should carefully consider the laws of the states in which they engage distributors and prepare accordingly. The distribution relationship is a marriage that can be difficult to annul. To the extent that a particular state allows the recitation within the distribution agreement of the specific responsibilities of the distributor — such that those may be pointed to by the brand as evidence of cause for termination — all the better. Nevertheless, be wary that some states may refuse to enforce certain parts of that prenup (e.g., performance requirements) as being against public policy. Moreover, nearly all state franchise laws are constructed to favor the distributor over the brand. Tread carefully.
Brian B. DeFoe is a business lawyer at Lane Powell, where he focuses his practice on helping companies in the customer-facing food, beverage and hospitality industries. Brian can be reached at firstname.lastname@example.org, via phone at (206) 223-7948, on Twitter @BrianBDeFoe or Instagram @HoochLaw. Visit www.hoochlaw.com for more thoughts on spirits and the laws that govern them. Brian would like to acknowledge the contributions of Bryan Taylor, a 2018 summer intern at Lane Powell, for his contributions to this article. This is intended to be a source of general information, not an opinion or legal advice on any specific situation, and does not create an attorneyclient relationship with our readers.
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