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A Franchise Dispute is Brewing

August 14, 2017 by Christina Laun Fugate, Partner | George A. Gasper, Partner

A Franchise Dispute is Brewing

A flurry of litigation is brewing over the Ohio Alcoholic Beverages Franchise Act (the Act) as Great Lakes Brewing Company seeks to require its distributor to obtain Great Lakes’ approval before changing ownership. The case is currently taking a second lap before the Sixth Circuit to determine whether Great Lakes violated the Act.

The crux of the dispute is whether a franchisor for the distribution of alcohol can require a distributor to obtain the manufacturer’s approval for a change of ownership and, if so, when does a manufacturer “unreasonably withhold” consent.

The Great Lakes distribution agreement provides that (i) the distributor must seek Great Lakes’ prior written consent to any changes in its ownership; (ii) Great Lakes would not unreasonably withhold its consent to ownership change, guided by its business judgment; and (iii) Great Lakes can terminate the agreement if the distributor fails to comply with its obligations.

Ohio Glazer merged with another distributor, Southern Wine & Spirits of America, in June 2016 to form Southern Glazer’s Wine and Spirits. Ohio Glazer did not receive prior written approval from Great Lakes before merging. However, after the merger it asked for after-the-fact consent from Great Lakes, which Great Lakes refused to provide. Ohio Glazer, in turn, sued Great Lakes in a declaratory judgment action seeking to preliminary enjoin Great Lakes from terminating the franchise agreement.

The district court found that the distribution agreement violated Ohio’s Alcoholic Beverages Franchise Act and granted the preliminary injunction. Great Lakes appealed to the Sixth Circuit, which reversed the trial court’s decision. The Sixth Circuit reviewed Ohio’s Franchise Act, specifically R.C. 1333.84.

Revised Code 1333.84(F) provides that a manufacturer of alcohol cannot refuse to recognize its distributor’s right to sell the distributor’s business. However, the distributor “shall have no right to sell, assign, or transfer the franchise without the prior consent of the manufacturer, who shall not unreasonably withhold the manufacturer's consent.”

The Sixth Circuit held that the Great Lakes’ franchise agreement complied with R.C. 1333.84(F). Great Lakes was required to use “reasonable business judgment”—which was equivalent to the “reasonable standards for fair dealing” requirement in the Franchise Law—when determining whether to approve Ohio Glazer’s change in ownership. Accordingly, the Sixth Circuit reversed and remanded the case, because the agreement was “valid under the Franchise Act. Thus, the sole basis on which plaintiff intends to succeed at trial is without legal support.”

Two days after the Sixth Circuit’s decision, Southern Glazer filed a renewed motion for preliminary injunction. In its renewed action it changed its theory and argued that Great Lakes had unreasonably withheld consent for the merger as Great Lakes’ refusal was based on pretextual reasons and unreasonable processes that failed to align with its announced practices and general standards for fair dealing. The trial court granted the motion for preliminary injunction, and two days later, Great Lakes appealed to the Sixth Circuit again, which is still pending.

Within franchise agreements, it is quite common for certain rights to be exercisable only if the franchisor gives its consent and such consent “not to be unreasonably withheld.” Examples of such rights include change in the franchisee’s corporate structure, change of the franchisee’s ownership, or sale or assignment of the franchisee’s business. The key language “not to be unreasonably withheld,” which is the focus of the second Southern Glazer appeal, is not often litigated and has not been interpreted by many courts. As such, the Sixth Circuit’s impending decision could have a meaningful impact to all franchisors beyond the Ohio Alcoholic Beverages Franchise Act. The effect is yet to be seen—stay tuned!

For more information, contact Christina Fugate, George Gasper or another member of our Franchise and Distribution Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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