Distribution Contracts for Breweries in New York

A critical step in the growth of a brewery is the decision whether and when to start distributing.  Some breweries engage a distributor right out the gate whereas some will remain on premises and self-distribute for life, and there is a definite trend towards the latter.  It is imperative that before you enter into in a written agreement with a distributor that you have someone with experience, usually an attorney, review that agreement.  Why?  Because wholesale contracts are notoriously difficult to get out of, even in New York where, thanks to the efforts of David Katleski of Empire Brewing and the NYS Brewers Association, we have wholesale law reform.  Because it’s tough to get out of these contracts, you’ll want to be sure you’re happy with it before you sign.  The contract that the distributor hands you was almost certainly written by a distributor or a distributor’s attorney and, understandably, it probably will be distributor friendly.  You’ll want to make sure you have someone representing your interests, and you might even consider being the one to bring your own contract to the table.  Below is a non-exhaustive list of a couple issues to keep an eye out for:

  1. Quality Control: Is the distributor required to take steps to maintain the quality of your beer after it leaves your brewery? Consider requiring things like temperature control, destruction of out-of-code product, and even draft line cleaning at retail accounts if you can swing it.
  2. Indemnification: The contract will almost certainly have an indemnification clause, which basically means that one party, or both, will have to repay the other party for some loss that occurs in the future. This is critical because it could mean that if the distributor gets sued, you might be stuck with any damages they are found liable for and even their attorneys’ fees, so you’ll want to know in exactly what circumstances this would occur.  Also watch out for one-way indemnification clauses.
  3. Sales Targets: Do you want to set any sort of sales targets or goals, even general ones, in the agreement? It may be useful down the line if you feel your brand is being neglected.
  4. Intellectual Property: These agreements will almost always have an intellectual property section, dealing with trademark, copyright, and other IP. You will want to read it carefully to make sure that you, the brewer, retain all ownership of the IP in every eventuality.
  5. Risk of Loss: Where does the risk of loss of the product transfer from your brewery to the distributor? Is it when it leaves your loading dock, when it’s on the truck, when it arrives at the distributor?  You’ll need to familiarize yourself of the concept of FOB.
  6. Termination: This is one of the big ones. Most distribution contracts provided by distributors will allow the distributor to terminate the contract without cause upon a certain number of days’ notice, but it is much more complicated for the brewery to terminate.  This is where you will need to have a good understanding of Section 55-c of the NY Alcoholic Beverage Control (“ABC”) law.  This law, among other things, allows brewers in certain circumstances to terminate distribution agreements without good cause upon payment to the distributor of the “fair market value” of the distribution rights that will be lost or diminished due to the termination.  What constitutes “fair market value” is not precisely defined in the law.

 

 

This article is intended to provide general information on a wide range of issues, including legal issues, affecting the brewing industry.  It is not intended to provide specific legal advice and no legal advice is given.  You understand that merely using this blog does not create an attorney client relationship between you and Harris Beach PLLC or Brendan Palfreyman. The blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

Brendan Palfreyman