A franchise law reform bill that would make it easier for Pennsylvania breweries to terminate relationships with wholesalers has been introduced in the state Senate.
“Pennsylvania has over 300 breweries and is the second largest beer producing state in the nation, yet we remain saddled with an outdated and unfair set of distribution laws that hamper growth and market penetration,” Brewers of Pennsylvania executive director Adam Harris said in a press release.
Under SB 623, which was referred to the Senate law and justice committee on May 3, breweries and wholesalers would have to revisit their distribution contracts every five years. All distributing agreements “shall include all territorial assignments, [and] shall be renegotiated in good faith by the fifth anniversary of a written agreement,” according to the bill. If the contract cannot be renegotiated after five years, the parties must enter mediation with a mutually agreed upon mediator or, failing that, a mediator appointed by “a court of competent jurisdiction.”
“We felt it was a fair compromise for both parties,” Harris told Brewbound of the five-year renewal requirement.
Brewers Association (BA) general counsel Marc Sorini told Brewbound the five-year renewal term “would not be unusual in either its shortness or its length” in any industry, but the permanent nature of contracts between breweries and wholesalers due to franchise laws adds complexity. In most other industries, “perpetual contracts are unenforceable,” and franchise laws “often mandate what the law generally forbids.”
“Adding a five-year maximum before renegotiation accordingly would approximate what most businesses must do when their contracts expire. Mandating a set time period for renegotiation is, to my knowledge, a feature not currently in any existing beer franchise law,” Sorini wrote in an email to Brewbound. “But the change would make contract relationships between brewers and beer wholesalers in Pennsylvania function more like relationships between parties in most other industries – including relationships between wine and spirits suppliers and their brokers in Pennsylvania.”
Breweries would be able to terminate relationships without good cause by providing 60 days’ notice to wholesalers and paying the wholesaler the “fair market value” of their brand rights. As with the five-year negotiation requirement, an arbitrator must step in if the parties cannot agree on fair market value.
Excluded from the new provision to leave without good cause are breweries whose termination would cause a wholesaler “irrevocable loss.” The bill defines this as breweries whose brands account for 10% of “the entire liquid volume of malt or brewed beverages or gross sales amount distributed by the importing distributor in the 12 months preceding the written notice, whichever is less.” Those breweries would need to provide “good cause” to terminate their contracts.
According to the bill “good cause” is defined as “the failure by any party to an agreement, without reasonable excuse or justification, to comply substantially with an essential, reasonable and commercially acceptable requirement imposed by the other party under the terms of an agreement.” The aggrieved party must inform the other and give them the opportunity to take corrective action.
The bill defines fair market value, if not specified in the parties’ distribution agreement, as “the amount a willing seller, under no compulsion to sell, would be willing to accept, and a willing buyer, under no compulsion to purchase, where both have knowledge of the relevant facts would be willing to pay for the importing distributor’s business with respect to the brand or brands.”
“I believe this proposal is the kind of change needed in this state if breweries are to stay strong and grow and assist the commonwealth with its economic recovery from the pandemic,” bill sponsor state Sen. Dan Laughlin (Erie) said in the release. “It is fair and long past due, and I hope the Legislature takes immediate action on Senate Bill 623 to assist this crucial industry.”
Pennsylvania is home to 444 craft breweries, ranking it third in the nation, according to data from the BA. Those breweries, which include the Boston Beer Company’s production facility in Breinigsville, which produced 3.1 million barrels of beer last year and generated $5.55 billion in economic impact in 2019, second only to California in volume and economic impact.