Last month the Supreme Court of Ohio helped clarify an oft-litigated feature of the state’s beer and wine “franchise” law.  Like most such enactments, Ohio’s franchise law (the “Ohio Alcoholic Beverages Franchise Act”) generally requires a manufacturer or importer to show “cause” in order to terminate an Ohio distributor.  But a provision of the law permits the “successor manufacturer” of a brand to terminate Ohio distributors without cause within 90 days of acquiring that brand.  The successor must compensate the terminated distributor for the value of the distribution rights terminated.

The successor manufacturer provision, Ohio R.C. 1333.85(D), has been the subject of significant litigation in the past decade.  The recent opinion of Esber Beverage Company v. Labatt USA, Ohio S. Ct. No. 2012-0941 (Oct. 17, 2013), clarifies one important question surrounding the application of the law.

The Esber Beverage case arose after KPS Capital Partners acquired Labatt USA after U.S. antitrust authorities required the sale of U.S. Labatt rights following the purchase of Anheuser-Busch by InBev.  KPS/Labatt USA sought to terminate Esber Beverage under the authority of the successor manufacturer provision.  The Ohio trial court, however, held that the law’s successor manufacturer provision only applied if no written franchise agreement existed between the distributor and the former manufacturer.  Because KPS assumed the agreements Labatt USA had with Esber Beverage and other distributors, the trial court reasoned that the successor manufacturer provision did not permit termination.  An Ohio court of appeals reversed, and the Supreme Court of Ohio took the appeal.

Evaluating the question, the Ohio Supreme Court held that the successor manufacturer provision “is clear and unambiguous and permits successor manufacturers to assemble their own team of distributors so long as the successor manufacturers provide timely notice and compensate those distributors who are not being retained.”  Rejecting Esber’s argument that the successor provision should not apply where it held a contract with Labatt, the Supreme Court invoked the franchise law’s provision that prohibits parties from waiving any provision of the law.

While the Esber Beverage case does not resolve every question surrounding Ohio’s successor manufacturer provision, it does settle an important one.  Indeed, just one day before publication of the Ohio Supreme Court’s opinion, a U.S. District Court, applying Ohio law, enjoined a termination under the successor provision partially in reliance on the very contract argument rejected in Esber Beverage.  See Tri Country Wholesale Distributors v. Labatt USA, S.D. Ohio No. 2:13-CV-317 at *35 (Oct. 16, 2013).