Franchise laws, as applied to the  craft beer industry, have the negative potential of restricting the possibilities for growth (small brewers may avoid expanding into a test market because they will first have to tie themselves to a distributor forever) and allowing distributors to hold breweries to a relationship that is neither healthy nor profitable for either party.

Franchise laws were viewed as a necessity a few decades after Prohibition, when few breweries remained operational. Those that remained were generally doing the uninteresting: mass-producing uniformly flavored beer. However, the efficiency of these breweries came at the expense of flavor and creativity and would put many smaller breweries out of business. This led to a great deal of consolidation in the beer industry and ultimately led to the existence of several large breweries with power to influence the policies of the next tier of the distribution system, the distributors themselves. It was against this backdrop of a huge increase in the market share of the top handful of brewers in the country that franchise laws were logically applied to the beer industry.

Franchise laws essentially restrict the ability of a brewer to leave its distributor. Breweries are married to their distributor for the life of the brewery. This made sense when small wholesalers relied upon large breweries for a majority of their business and spent their time and money building these brands. Like most things, times have changed and so have the circumstances. Forty years ago, the brewers were few and huge while the distributors were the little guys. That landscape has been flipped. We would be fooling ourselves if we didn’t believe that some breweries (BudMillerCoors) don’t still retain the power to control distributors and that they don’t wield that power. But for smaller craft breweries, piling all of the bargaining power onto the side of the party that already possesses a majority of the bargaining power based upon size and resources makes little sense. Florida law (see Fla. Stat. 563.022) essentially puts distributors in a position to tell breweries to do as they say, “or else”. If a distributor orders beer, even if it won’t be quick to actually distribute that beer (essentially leaving it in the warehouse while the brewery suffers from lack of brand-building and while the beer gets old), the brewery must quickly provide such beer or will be breaking the law. Breweries must have good cause to break a contract with a distributor, proof of which requires burdens of time and money that brewers do not have. The parties being protected by these laws have more power than those with whom they contract. These laws are not leveling the playing field. They are tipping the scales even further into the favor of one group.

I’ve said before, the three-tier system is preserved by common sense and reality. Brewers are not going to bypass the distribution tier. They all realize they need each other (a mandatory system isn’t necessary to accomplish this). Distributors have nothing to distribute without brewers and brewers are not going to buy fleets of trucks to get their product into more locations. It’s not feasible. The three-tier system would continue to operate with less regulation (the rest of the country is proof).

While this may not seem like an enormous issue right now, it will likely become one as the craft beer industry continues to grow. With more and more brands moving to market, each craft brewery and brand will represent only a tiny portion of a distributor’s business. If a brewery is watching as its products are suffering with a distributor that may simply be too busy to properly focus on their brand, it must have a reasonable way out of a contract.

In North Carolina, for example, small breweries (those  that sell less than 25,000 barrels) do not need good cause to terminate their relationship with a distributor. By defining a carve out based upon production/sales, distributors remain safe from losing the business of those who represent a meaningful percentage of their overall business. North Carolina small breweries must pay the distributor with whom they terminate a relationship the fair market value for the distribution rights for the given brand. Determining fair market value there (“the highest dollar amount at which a seller would be willing to sell and a buyer willing to buy at the time the self-distribution rights revert back to the brewery, after each party has been provided all information relevant to the transaction”) may create its own set of issues, but provides a more reasonable out for breweries that may need to escape to survive.

Right now, there is little reason for distributors to work with craft brewers to contract around franchise laws (of course, distributors receive a higher margin on craft brands than others, but they will generally get those craft brands anyway).  Just as distributors are protected from the big guys that can wield excessive power over them and have a disparate impact on their business, craft brewers should be afforded similar protection in comparable circumstances.