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The Country’s Biggest Beer Distributor Just Got Beat in Court. Here’s Why It Matters.

A rule of thumb I’ve learned in a dozen-plus years reporting on the beer business is that most readers simply do not give a shit about the three-tier system, to the extent that they even know it exists. Of the bunch, they care about the middle tier — beer distributors — least of all. However! Hop Take readers are smarter than most, and earlier this month in the country’s second-biggest beer market, the country’s largest wholesaler lost a lawsuit that showcased a major source of the middle tier’s power, and its limits. You better believe we’re going to talk about it.

The case, Harbor Distributing LLC (d/b/a Golden Brands) vs. Mainsheet Capital, Inc. (d/b/a Anderson Valley Brewing Co., had been winding its way through California’s court system for the past half-decade until earlier this month, when the Superior Court of California in Sacramento County issued its ruling in the matter. Finding for Anderson Valley Brewing Co. (AVBC) in a June 7 ruling, Judge Andre K. Campbell wrote that “Harbor’s proffered interpretation of ‘beer manufacturer’ would lead to an absurd result” when applied to the relevant state law.

The upshot, in lay terms? Hizzoner ruled that Golden Brands — a subsidiary of Reyes Beverage Group (RBG), the largest beer distributor in the country and its sixth-largest privately held company — couldn’t recover the hefty fair-market-value compensation it had demanded for AVBC’s exclusive brand rights in the Golden State territories in question, because it was never really entitled to it in the first place.

To industry observers, terms like “fair-market-value compensation” and “exclusive brand rights” should ring out like a klaxon warning that shit is about to get gnarly, but for the uninitiated, some quick background is in order. After Prohibition, lawmakers were almost as worried about letting the beer business backslide into vertical integration (“the tied-house system”) as they were about entrusting the federal government to regulate alcohol after nearly 14 years of violence, corruption, and embarrassing failure ushered forth by the 18th Amendment. Congress punted delegated the problem to the states, which implemented the proscribed “three-tier system” as they saw fit, with an eye to ensuring no firm could consolidate beer’s entire supply chain.

Later, to stop deep-pocketed macrobrewers from putting the screws to their comparatively small-time distributors, some legislatures fully enfranchised the middle tier with brand rights (hence, “franchise laws”) in laws requiring “good cause” for termination, and entitling wholesalers to fair market value of those contracts. Others did not. The result is a classic example of the “50 different states, 50 different systems” legal patchwork that characterizes so much of the United States’ a-federal approach to alcohol regulation. For example, the franchise protections in Texas, the country’s No. 1 beer-selling market, are often considered some of the strongest in the nation, while those of No. 2 California (home to AVBC and the territories in question), are relatively weak by comparison.

Another rule of thumb I’ve learned over the years is brewers and distributors have roughly inverse relationships to the strength of their states’ protections for brand rights. The stronger they are, the happier the middle tier is, the unhappier the supplier tier is, and vice-versa. Exclusive, expensive-to-transfer brand-rights rules, as many states require, offer beer wholesalers de facto downside protection on operational investments made to establish a hot brewery in the market, but it can leave breweries (which have no such backstop) in a bind if those independent partners cool to their products.

“These rules are meant to protect the wholesaler from investing in a brand and then having it move to their competitors, but all too often for small producers, it’s a way for wholesalers to round up small breweries, bury them in a book with too many SKUs (sometimes even unwittingly), and then hold them ransom,” argued Michael Kiser, the co-founder of the beverage-innovation consultancy Feel Goods Company, in a 2017 column for Good Beer Hunting. The term for this practice in the trade is “brand-collecting,” and for smaller beer brands that have been collected, it can be devastating for sales in a given territory.

Wholesalers would insist this is rare behavior, and to be fair, many brewery owners would agree. That includes AVBC’s president and chief executive Kevin McGee. “I think it’s a small minority, actually,” he tells Hop Take in a recent phone interview, expressing “love” for the firm’s 50-plus distributors nationally. Prior to acquiring AVBC with his father in December 2019, McGee had over two decades of experience working on alcoholic-beverage licensing as an attorney. In his view, friction between breweries like his and distributors like Golden Brands stems less from brand collection and more from business models that grow apart over time.

If AVBC’s lineup was designed to sell best in national chain supermarkets and convenience stores, he says, Reyes Beverage Group “would be my go-to place” for distribution. But beers like Boont Amber Ale and Blood Orange Gose sell better in independent accounts, and particularly independent on-premise accounts, which he says Golden Brands had begun servicing with telesales rather than in-person visits “even before Covid.” Other factors, like what he describes as the distributor’s matter-of-fact refusal to support the rollout of Tropical Hazy Sour, AVBC’s main 2020 launch, in “about a third” of its territory, made it clear to McGee that the relationship had deteriorated beyond repair.

After McGee alerted Golden Brands that the Boonville brewery wanted to transfer its distribution appointments to three other wholesalers, “I got a phone call back, and the message was, ‘We’re not going to do that. Here’s what’s going to happen.’” RBG wanted “several millions of dollars” for what it viewed as the fair market value of AVBC’s appointments, and it wanted that payout from AVBC. “They knew that there’s no way a distributor was going to pay them the amount of money that they were going to ask from us” given the brand’s declining sales in the territories, craft beer’s general struggles as a segment, and the sheer number of breweries in the landscape, surmises McGee. A month later, on March 26, 2020, the brewer formally alerted Golden Brands that it was transferring its distribution appointment to three other wholesalers without payment. Three days later, the wholesaler filed its suit.

RBG did not respond to Hop Take’s multiple requests for comment on the case. A spokesperson issued a statement to Brewbound last week saying it “remain[s] committed to protecting the fair market value of distribution rights, which incentivizes investment and helps ensure that California is a strong and orderly marketplace for the distribution of beer to retailers and consumers.”

California’s legal code does not entitle wholesalers to fair market value for brand rights, nor does it require good cause for termination. McGee says AVBC had no contract in place with Golden Brands requiring either. (The state only requires breweries to file written distributor “appointments,” and AVBC wound up in the distributor’s portfolio via its acquisition of another appointee, with which the brewery’s previous owners had only the lighter-weight agreement in place.) Instead, the wholesaler’s lawsuit turned on the definition of the terms “beer manufacturer” and a “successor beer manufacturer” under California’s Alcoholic Beverage Control Act. Golden Brands contended that Mainsheet, a special-purpose investment vehicle formed by the McGee family, was a brewer because it technically owned the brewery’s assets, including beer in the tanks, for some 60 seconds prior to the start of its license. Theoretically, that might have given them a path to recover, but Judge Campbell decided that Golden Brands’ definitions were bullshit. In so many words, of course.

For AVBC, the significance of the ruling is obviously a big deal. For Golden Brands, it’s probably not. “The Reyes Beverage Group does not need money from Anderson Valley Brewing Company in order to break even this quarter,” jokes McGee. (Forbes estimates that Reyes Holdings, RBG’s parent, generated $40 billion nationwide in 2023.) Victory came at a cost, though. It took McGee four years of on-and-off litigation, and the associated legal fees to outside counsel, to win out against his brewery’s one-time wholesaler, plus 22 years of experience to give him the confidence to even try. How many breweries in California — let alone states with stricter franchise laws — have that kind of time or resources?

I’m open to the idea that many (or even most) beer distributors can add value for the breweries in their portfolio, including Golden Brands and RBG. I’m even sympathetic to the argument that many wholesalers hammer about the need for some franchise protections to secure investment against the machinations of multinational macrobrewers — so long as they’re open to carving out smaller brewers from those requirements, something the Brewers Association and state guilds have been working on with moderate success in recent years. Abolishing the middle tier is little more than wishcasting in this political climate, especially given the National Beer Wholesaler Association’s political clout. Incremental good-faith tweaks to the three-tier system are the best contemporary craft breweries can hope for, and that requires buy-in from distributors.

But as the industry’s tailwinds have turned to headwinds over the past half-decade, the ongoing power imbalance between large wholesalers and small, independent craft breweries has become more obvious, and a lot uglier. This type of litigation benefits no one. Not the brewer, who has to put up or shut up; not the wholesaler, who even in victory looks like a bully throwing its weight around; certainly not the drinker, who wonders why they never see an old favorite on draft anymore these days. You hear a lot of talk about “true partnership” from middle-tier players, and craft breweries could sure use it these days. But this ain’t it.

🤯 Hop-ocalypse Now

In the grand scheme of editorial choices for which The New York Times deserves criticism, the paper’s beer coverage is not high on the list. (Then again, my byline has appeared in those pages, so…) Hop Take being a beer column, though, I can’t pass up the opportunity to point out the Gray Lady really shies away from desperately needed brewing-industry reportage in favor of softer focus stuff, like this item last week about a Utah brewer who made a beer with ancient yeast. It’s fine. It’s fine! But as a journalist covering the brewing landscape week in and week out, I think it’d be swell if the country’s paper of record dedicated more of its best-in-class resources to investigations into the $117 billion beer business, rather than gawky drive-bys on those zany craft brewers at it again. We already did that, NYT! You already did it, too! Come join us lowly beat reporters in the deep end!

📈 Ups…

Allagash Brewing Co.’s first non-alcoholic beverage is a hop water, which is progress! (Though it’ll be taproom-only for now)… More evidence emerges that the beer/cannabis relationship is more complicated than “zero sum”Delaware lawmakers have passed third-party home delivery for beer

📉 …and downs

Major universities advertising rock-bottom prices on stadium beers sure seems like a good way to foment regulatory backlash, but what do I know?… Glass manufacturer Ardagh will lay off 220 workers when it closes its Houston bottle plant in JulySupermarkets are experimenting with surge pricing on food now…

The article The Country’s Biggest Beer Distributor Just Got Beat in Court. Here’s Why It Matters. appeared first on VinePair.

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