A group of Massachusetts craft brewers knocked on doors at the State House in Boston last Wednesday in an effort to rally support for a bill, HD999: An Act Relative to Small Brewers.
Their argument? The growing notion that the legal relationship between brewers and distributors is antiquated, and in need of adaptation.
Rep. Alice Peisch (D-Wellesley) is the lead sponsor of the bill. It would amend chapter 138, section 25E of the current state law, which brewers say makes it very difficult for them to terminate contracts with underperforming distributors. Under the proposed bill, a small brewer would be able to break a contract with a distributor with at least 30 days notice if they pay fair market value (specific to each case). Geared toward small and local craft operations, a brewery would only be eligible to break the contract if they do not exceed 20 percent of a distributor’s total sales.
Section 25E sprouted from state laws that responded to post-prohibition in the 1930s, Peisch said, and currently provides small, local brewers with a “very onerous process to terminate a relationship with a distributor.”
“A lot of [the laws] may have made a lot sense at that point time,” Peisch said, “but now seem somewhat arcane.”
Rob Martin, president of the Massachusetts Craft Brewers Guild, has been advocating for the bill, claiming that his constituency needs to be able to find distributors who will work to sell their products instead of allowing them to languish.
“Everybody that we tell about it is silent with their jaw open,” Martin said of section 25E, “because you don’t think that this kind of protectionism actually exists in commerce in the United States anymore.”
Rep. Alice Peisch
On Wednesday at the State House, Martin joined representatives from breweries such as Berkshire, Wachusett, Boston Beer, Harpoon, The Tap (formerly known as Haverhill Brewing), Cape Ann, Mayflower, Buzzards Bay and more, aiming to persuade legislators to support their cause. According to Peisch’s office, the bill has already gained support from Representatives Stephen Kulik (D-Worthington), Jason Lewis (D-Winchester), Timothy Madden (D-Nantucket) and Kimberly Ferguson (R-Holden).
Martin emphasized that in the 1970s, when Section 25E really made sense, Massachusetts had around 60 small distributors to complement only 50 national breweries. This relationship has reversed as craft beer’s popularity has boomed. There are currently 16 beer distributors in the state and, according to the Brewers Association as of Jan. 11, 2,336 craft breweries nationwide. This bill, Martin argues, intends to level the playing field.
Similar arguments are being made in other states, all of which have their own interpretations of the three-tier system. Last August, New York Governor Andrew Cuomo signed the “Small Brewers Bill,” allowing the state’s small brewers to more easily terminate their contracts with wholesalers. The bill also allows New York State brewers that produce fewer than 300,000 barrels annually, or account for three percent of the distributors total annual brand sales, to terminate their contract provided they pay the wholesaler fair market value.
Just three weeks after that change took effect, Manhattan Beer Distributors purchased the distribution rights to Avery Brewing (in New York City) from American Beer Distributing. The Bronx-based wholesaler also recently acquired the distribution rights (in the five boroughs) to Shipyard Brewing and Shmaltz Brewing from SKI Beer Corp.
Martin is hoping for similar changes in Massachusetts.
“If their business model changes, we have to accommodate their change,” Martin said. “If our business model changes, they don’t have to accommodate us. It’s a very one-way street.”
Martin said that small, startup breweries have been wary of entering contracts with distributors because they’ve heard rounds of business-crippling buyout stories from brewers who felt misrepresented by their distributor. Martin’s got one of his own.
After several years of self-distributing his Stone Cat Ales & Lagers, Martin began to sell the brand through a distributor. When sales started to decline, he asked for his brand back, but the distributor, whom he did not identify, refused. Martin couldn’t finance a buyout because he was a small startup with meager funds. In short time, he said that Stone Cat’s brand became so damaged, it didn’t make sense for him to continue making the beer. Similar stories are often heard by young brewers, Martin said, and he believes they limit their own growth in response.
“There are certainly some brewers out there that are sitting on the sidelines because they don’t want to make this decision that’s going to last for the rest of their business career,” Martin said.
The change to the law, Martin said, could ease that process, encourage expansion and create jobs.
John Stasiowski, president of the Beer Distributors of Massachusetts, doesn’t know what all the fuss is about. He points to the encouraging sales of craft beer and fully believes that the current law is fair and reasonable.
“We think there’s ample recourse for them under current law,” Stasiowski said. “This provision would exempt them from current law and also say that they can get out of their contracts regardless of whether they have any cause.”
He argues that this kind of legislation could be costly for a distributor that has spent resources and time developing a brand. And what about those breweries that can’t handle a buyout?
“It’s a cost of doing business,” Stasiowski said.
The bill could also discourage distributors from pursuing or supporting small breweries in the future, Stasiowski added.
“If you weaken the middle tier by allowing brands to move back and forth,” he said, “what sort of investment is a distributor going to want to make in a brand, a new brand or an existing brand, when hanging over its head is the fact that he could lose it for no reason tomorrow?”
Peisch and Martin both believe that the bill has a strong chance of passing because of the growing legislative support. It also amends what many believe is a law that just doesn’t work with the current structure.
“The application of the current law is not, I don’t think, working in the way that best serves the most people in the commonwealth,” Peisch said.