Massachusetts’ Franchise Reform Debate Resumes

The nearly decade-long debate over Massachusetts’ controversial franchise laws resumed Monday, as the state’s craft brewers and beer wholesalers packed a meeting of the Joint Committee on Consumer Protection and Professional Licensure.

Brewers and wholesalers remain divided on how to reform strict franchise laws, which brewers claim lock their businesses into nearly unbreakable relationships with wholesalers. Each side presented revised proposals, which they argued would benefit each other.

Although reform efforts succeeded this year in Maine, Maryland and North Carolina, success in Massachusetts appears more distant.

The Legislation

Craft brewers’ latest proposals (H. 327 and S. 104) would create a three-tiered system based on production volume.

Brewers in the smallest tier, who make 5,000 barrels or less, would be required to give 30 days’ notice and pay “no less than” 50 percent of fair market value to terminate their wholesaler contract. Currently, about 134 Massachusetts breweries would qualify.

Beer companies in the middle tier, those making between 5,001 and 350,000 barrels, would be required to give 45 days’ notice and pay fair market value. About 19 breweries currently qualify.

Beer manufacturers in the largest tier, those making between 350,001 barrels and 6 million barrels, would be required to give 60 days’ notice and pay 110 percent of their brand’s fair market value. Only Boston Beer Company — which last year produced more than 4.5 million barrels of Samuel Adams beer, Truly Hard Seltzer, Angry Orchard cider and Twisted Tea products, among other brands, and recently completed a merger with Dogfish Head Craft Brewery — is in this tier.

Under the brewers’ bill, an independent third-party arbitrator would decide any dispute.

Beer wholesalers returned to the statehouse with legislation (H. 3549 and S. 178) that raised the ceiling on their previous offer, allowing beer makers producing fewer than 100,000 barrels during a 12-month period to opt out of their contract by giving 90 days’ notice and paying fair market value, plus the cost of inventory. Wholesalers’ previous offer to terminate was capped at 30,000 barrels or less.

The new proposal also requires that wholesalers receive “full compensation” before termination would take effect. The Massachusetts Alcoholic Beverages Control Commission would also oversee any termination disputes.

The Hearing

During Monday’s meeting, dozens of employees of beer wholesalers — wearing blue shirts that read “Pass H. 3549 & S. 178. The 99 percent solution. The fair compromise” — packed the meeting room and overflowed into the hallway. Meanwhile, a smaller group of craft brewers represented members of the Massachusetts Brewers Guild.

Guild president and Night Shift Brewing co-owner Rob Burns testified that the craft brewers’ legislation levels the “playing field” and accounts for the different needs of small brewing companies.

Boston Beer Company founder Jim Koch added that the wholesalers’ bill would treat his company — which accounts for about 2 percent of the U.S. beer market — similar to much larger global brewers such as Anheuser-Busch InBev, MillerCoors and Heineken.

Lawmakers directed most of their line of questioning on the size of publicly traded Boston Beer ($4 billion market value) and where the bulk of its production is located (Pennsylvania and Ohio). Founder Jim Koch estimated that Boston Beer sold about 400,000 barrels of product in Massachusetts alone last year, and is on track to sell about 500,000 barrels by the end of 2019.

In order for Boston Beer to move its business, Koch said, his company would have to pay between $150,000 and $200,000.

“We would be penalized,” he said, adding that wholesalers would receive five to 10 years of gross profits “for something they got for free.”

According to Koch, if the craft brewers’ bill passed, 80 percent of the beer sold in Massachusetts would still be protected by Chapter 138, section 25E of the Massachusetts General Law, which governs relationships between wholesalers and alcohol manufacturers.

Several leaders from Massachusetts’ largest beer wholesalers testified on the necessity of franchise laws, while urging lawmakers to pass legislation that they say would also benefit the majority of the state’s small brewers.

Atlas Distributing vice president Jamie Salois testified that the wholesalers’ bill would give “99 percent” of small brewers greater flexibility, while also protecting beer distributors’ businesses.

Horizon Beverage executive Michael Epstein argued that the brewers’ bill contains only “cosmetic” changes and would be a “job killer.”

Burke Distributing president and CEO Bill Burke pointed to Red Bull’s termination of his company earlier this year, which resulted in 72 layoffs. Non-alcoholic brands are not subject to franchise laws.

“Red Bull’s decision to terminate us for no reason brings into question the safety of the remaining 265 employees who are still employed today, if alcohol brands can walk away without cause,” he said.

Red Bull accounted for 25 percent of Burke’s volume, with sales of 1.4 million cases in the state last year, according to Burke general manager Tim Burke.

Meanwhile, Koch and Burns argued that forcing craft breweries to remain with underperforming wholesalers could lead to more closures. Burns noted that one brewer — Opa Opa — “died trying to fight to change this [franchise laws] to get out of their wholesaler relationship.” Burns later told Brewbound that the wholesalers’ bill contains extended waiting periods that also make it unacceptable compared to the existing law.

Koch explained that his company has yet to terminate one of its 400 wholesalers for poor performance. Instead, he said his company has tried to fix those relationships. In one instance, Koch said the company waited for the owner of an underperforming wholesaler to die.

“I didn’t terminate them. I knew the owner was going to die. You wait; it’s easier than fighting your wholesaler because they can strangle you in the years — years — that this litigation takes,” he said. “We’re trying to get it done in less than half a year. And we’re all willing to pay. It’s not like we’re going to get off scot free. I’m willing to pay not only the full fair market value to the wholesaler, but more money on top of that. What more can you ask for in this life?

“That is a sweet deal,” he added.

After the meeting, asked if franchise reform could potentially affect efforts to align the distribution footprints of Boston Beer and Dogfish Head into a single wholesaler network, Koch said “possibly.” Currently, Boston Beer and Dogfish are aligned in four out of five Massachusetts distribution houses.

“We think monogamy works a lot better in wholesaler relationships than polygamy,” he said.

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