February 10, 2021
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It’s one of the most important questions for a new brewer in the United States: who do we trust to distribute our beer? Thanks to the three-tier system, which requires that the companies that produce, distribute and sell alcohol in the US be separate, brewers must make common cause with distributors in each state - and each state has its own laws.
It can be a very complex area. Few people know this better than Brendan Palfreyman, an attorney at Harris Beach in Syracuse, New York and an expert in craft-beer law. He is known for his website, trademarkyourbeer.com, but also frequently deals with distribution law.
“If your relationship with your distributor is going well, all is well,” he says. “If your brand isn’t moving or they’re not focusing on your brand, then it becomes frustrating because the contracts are so hard to get out of.” Here are his thoughts on some of the crucial areas to consider when thinking about distribution.
Each state is different
“It is somewhat difficult as a regional or national brewer having to navigate a different set of rules for 50 different jurisdictions. If you’re a large brewer you’ll have a fairly substantial in-house counsel - but if you’re smaller, best practice would be to talk to an attorney in every state you’re going into. He or she is going to know the lay of the land there - and I doubt there’s any attorney who is licensed in all 50 states. That would be a very busy person!”
Look out for common agreement pitfalls
“A lot of times, contracts will be silent as to what the distributors’ responsibilities are vis a vi the brand. You want to make sure that you’re requiring them to go out and make reasonable efforts to sell your beer, to develop the market and develop new markets for your beer, and also to treat the beer well. You want to have language in there ensuring the beer will be refrigerated as much as possible, with the distributor using refrigerated trucks. And you want to look out for are indemnification clauses. You need to make sure those are mutual - that’s hard to argue against, it’s just fair.”
Think about sales targets
“Sales targets can be important. I don’t see that as much in New York, but there can be provisions [in an initial agreement] along the lines of an annual sales meeting, where the brewer and distributor will get together and discuss sales targets for the coming year. Then, typically, there will be a subsequent agreement which will be incorporated into the original agreement … it is tough to have sales targets in the original agreement because it can be tough to forecast.”
Termination is a problem
“Historically speaking it is very difficult. The baseline that a lot of states had was a termination for ‘good cause’ - which was very difficult to establish. In New York, for example, there were long ‘cure periods’ built in when a distributor could cure any problem. A number of states have had franchise reform - now in New York, in certain circumstances, you can terminate without cause, whenever you like. But you have to pay to the distributor the ‘fair market value’ of the distribution before you terminate. Vermont just passed a law a week ago where they actually define what fair market value is … in New York they just say fair market value.”
Can you self-distribute?
“It depends what state you’re in - in New York you can. It’s a good option for breweries starting up because your margins are going to be higher. You have to employ people to distribute it, and you need a truck or a van, and there are the logistics of supply and payment - but, especially for brewers that are very small and are in tightly knit areas, it can be very advantageous. If you’re in Brooklyn, for example, you’re going to be distributing to people within a couple of blocks of you - but if you’re out in a rural area, it would be harder to self-distribute to any adequate number of accounts.”
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