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cause to a distributor’s breach of a material and reasonable contract provision. A number of state laws expressly forbid a supplier from taking actions that “diminish” or “impair” the value of the distributorship or from substantially changing the distributor’s “competitive circumstances.” Some states forbid suppliers from restricting a distributor’s right to sell its business, and some forbid suppliers from discriminating in the terms offered to similarly situated distributors. Statutory protections override contract provisions to the contrary. This is true even when a distributor is represented by independent legal counsel and negotiates special terms for itself. The patchwork of state relationship laws may hinder the ability of non-alcoholic beverage suppliers with nationwide distribution networks to make system-wide changes in all markets. For example, some state laws may prevent a supplier from unilaterally changing territory and authorized trade channel assignments even when the contract expressly gives the supplier these rights. Even within a single state, distributors who derive a significant percentage of

their total revenue by selling the supplier’s brands – typically 20 percent or more – may be regulated while multi-line distributors whose branded sales fall below this threshold are not. Not infrequently, non-alcoholic beverage producers discover these state laws the hard way – belatedly, only after seeking to terminate an independent distributor without cause or impose system-wide modifications to the distribution program pursuant to express contract authority. Non-alcoholic beverage suppliers must know which states have relationship laws, and the limitations that these laws impose, before terminating or initiating other regulated conduct with their independent distributors in that state. Unhappy distributors also often rely on a variety of other claims besides state relationship laws to challenge terminations and supplier conduct, including breach of contract, constructive termination, breach of the implied covenant of good faith and fair dealing, fraud, as well as state unfair trade practice laws. But, unlike state relationship laws, none of these claims will succeed when the parties’ contract specifically authorizes the supplier’s action.

What the parties call their relationship is irrelevant to whether a state relationship law applies. Adding to the confusion, relationship laws in Arkansas, Connecticut, Delaware, Mississippi, Missouri, New Jersey, Nebraska and the Virgin Islands include “franchise” in the title of their relationship law even though the laws are broadly written to cover ordinary non-alcoholic beverage distribution arrangements that do not qualify as franchises under classic definitions. The moral of the story is that state relationship laws cannot be waived between a non-alcoholic beverage producer and its distributors, and they apply no matter what the parties actually call their relationship. Failing to understand these laws carries significant risk, and the best way to mitigate these risks and avoid the nuisance of litigation is to know about these laws and act accordingly ahead of time. Copyright 2015 by Rochelle Spandorf. Rochelle Spandorf is a California State Bar Certified Specialist in Franchise and Distribution Law and a partner in the Los Angeles office of Davis Wright Tremaine LLP where she advises, among others, beverage producers regarding expansion strategies and independent distribution and dealer arrangements.

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BEVNET MAGAZINE MARCH 2015

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BevNET Magazine March 2015  

The March 2015 issue of BevNET Magazine.

BevNET Magazine March 2015  

The March 2015 issue of BevNET Magazine.

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