Wisconsin Brewer Hopes Discontinued Brand Can Set Major Legal Precedent

Austin Ray

This past March, a small beer brand called 3rd Sign quietly disappeared from the Wisconsin marketplace. It only had a short run to begin with, about two years, and it never enjoyed much success in terms of volume. Meanwhile, as the house brand for Octopi Brewing, a contract hub that focuses primarily on producing other people’s beers, 3rd Sign may have become more effort than it was worth, eventually losing priority for the company that made it. As reported last week by the Wisconsin State Journal, 3rd Sign was shut down entirely
 
For Octopi, a seemingly promising and ambitious brand was relegated to a side business, partly due to their own competency issues (more on that in a minute), but in the case of the now-pending lawsuit, there were also issues of wholesaler restrictions. But regardless of causality, on today’s beer shelf, and in the age of turnover, 3rd Sign struggled to become anything other than a completely unremarkable brand.
 
But the truth is that 3rd Sign is anything but unremarkable. Rather, Octopi believes the company can now be utilized as a catalyst for change. That’s because Octopi believes 3rd Sign is a casualty of grossly outdated regulations that essentially allow distributors to make hostages of beer brands. To that end, the company is suing a former wholesaler over the demise of 3rd Sign. But Octopi says it’s fighting not only for itself, but in hopes of setting a legal precedent that ultimately changes the way breweries navigate Wisconsin’s three-tier system going forward—largely because the current situation leaves any future brands Octopi may start out of their contracting hub vulnerable to the same scenario.

To know how Octopi came to view 3rd Sign through an activist lens, though, it’s important to get a sense of the regulatory environment in which it was bred. And as is the case across many of the United States, the rules separating the three tiers are a huge point of contention in Wisconsin.
 
“Not a day passes where there isn’t a new example of one of our small businesses trying to grow, or even get off the ground, being stifled by Prohibition-era laws,” says Wisconsin Brewers Guild president William Glass.
 
As for the 3rd Sign dispute, it relates to stringent franchise agreements and whether a brewery should have to pay fair market value for its own brand if it wishes to terminate a wholesale contract in favor of self-distribution.
 
This conflict’s origin can be traced back to May 2016, when 3rd Sign partnered with River City Distributing. Reflecting on the time before things went south, Isaac Showaki, Octopi’s president and owner, says the distributor did an “ok-to-mediocre job” of moving his product.
 
The real conflict began to take shape eight months later, when River City was acquired by Wisconsin Distributors, Inc. (WDI), an Anheuser-Busch InBev house. Worried that 3rd Sign would simply get lost in the new wholesaler’s vast portfolio, and unimpressed by a WDI presentation, Showaki informed both the acquired and acquiring wholesalers that he would not sign on in the transition and would instead pursue self-distribution.
 
“I tried to work with WDI on volume goals and objectives, but didn’t really see a future with them,” he tells GBH.
 
At this point, according to court documents, River City’s counsel sent Octopi a correspondence saying the company was “unreasonably” withholding 3rd Sign, and demanded $93,000 for returned control of the brand—a fair market value price calculated to be three times its annual gross profit. Octopi declined both to sign on with WDI as well as to provide payment. Following some back and forth in which neither side wavered, Octopi informed River City and WDI that it would simply discontinue the brand.
 
Which brings us to now. River City still wants to arbitrate, and is claiming the rights to future compensation for any new brands Octopi may establish, according to court documents. Octopi, meanwhile, counters in its suit that because the brand was discontinued, River City wasn’t terminated, therefore nullifying any dispute over fair market value for 3rd Sign or any future brand.
 
More than a ruling in this one dispute, though, Octopi hopes a judge will establish that, because brewers can’t legally be wholesalers in the state, they shouldn’t have to pay fair market value to a distributor if they want to terminate a contract and self-distribute their own beer.
 
“We’re the only industry where contracts are signed into perpetuity and it makes no sense,” Showaki says. “We just want an out.”
 
Which is to say, the company has its eyes set on precedent.
 
It may not be entirely fair, however, to assume that the regulatory environment was the only contributing factor to the self-imposed demise of 3rd Sign. By Showaki’s own account, the brand never really moved in the way he expected, despite his ambitious volume goals out of the gate, promises from wholesalers, and a sales team at Octopi fit for a much larger brand.
 
“[River City] really liked the brand, they saw a lot of potential, and they thought the brand was going to be great. [They said] we can definitely get you to the place you want very fast, we’re thinking anything from 2,000 to 3,000 CEs a month,” Showaki recalls. “But then they were selling 300-400 CEs a month.”
 
(According to one former employee speaking on condition of anonymity, that sales goal came from Showaki, not the other way around, and the wholesalers pushed back immediately.)
 
Although River City accounted for about 55% of the 3rd Sign volume in the distribution chain, the rest was split between Beer Capitol Distributing in Milwaukee (about 40%) and CJW Inc. in Kenosha (the remaining 5%), according to Showaki. The brand was sluggish in those houses, too, though. By Showaki’s examination CJW “was too small,” while Capitol was “gigantic…so we got very little attention.” Despite the brand underperforming, he says the business relationships were amiable, unlike the one forged with River City.

When GBH called River City for comment, we were directed to WDI. WDI did not respond to a message for comment as of press time, but we’ll update this post if we hear back.
 
The story of 3rd Sign has seemingly always been about a sluggish brand struggling to take root. The brewery debuted its beer with General Beverage, another wholesaler with which things also “didn’t go very well because they weren’t moving our brand,” according to Showaki. That relationship lasted for a mere six months before Octopi wanted out and General Beverage flipped the rights to 3rd Sign to River City. Constant wholesaler changes appears to have been the norm for 3rd Sign. 
 
On top of less-than-stellar sales with four different wholesale partners, 3rd Sign may have dealt with some quality issues, too. Before joining Octopi as a sales director, Joe Goldfine worked at Beechwood Sales & Service, another distributor in the state. Speaking on the Hop Forward podcast earlier this year and recalling his view of the brand as an impartial observer prior to joining the company, he said sales weren’t great.
 
“It came out with a bang and it landed with a thud with General Beverage,” he told the podcast. “They didn’t do so hot. I wasn’t with the brewery at that time. I just saw what I saw in the market… What was my initial thought of the brand? I thought it was shitty.”
 
“I thought the concept was cool,” he contiued, speaking of the company’s idea of releasing new brands in double-batches to highlight different interpretations of one style. “But the liquid was average-to-crap.”
 
Many startup breweries have quality issues out of the gate, but this was not Showaki’s first rodeo. He was a co-founder of 5 Rabbit in Chicago (his time there ended in copious lawsuits), and this new project was a contract hub, meant as a quality resource for many other up-and-coming brands in the Wisconsin market. 
 
In speaking to a former employee about the challenges for the operation, GBH learned it was clear to some that the 50-barrel brewhouse was way too ambitious for a new house brand with no market presence aiming for tens of thousands of cases a year. At the start, 3rd Sign was putting hundreds of barrels of beer into the market at one time.
 
For a startup, that’s an ambitious amount of beer to produce unless you have sales channels and distributors lined up with demand. But because of the contract hub model, Showaki didn’t have a smaller scale through which to push multiple SKUs. And because of the shifting distribution relationships, there was a disconnect. According to the former employee, this lead to pushback with their distributor, and a glut of old beer in the market. That pushed Showaki to open new markets, including Milwaukee, a market to which our source claims was given six-month-old IPA to for their launch. Eventually, the distributor in their home market of Madison stopped placing orders, and old beer went to Milwaukee until distributors there also pushed back. That lead Showaki to open up his third line to River City.
 
That’s the context into which this lawsuit was filed during the sale of River City to Wisconsin Distributing. Showaki saw an opportunity to start self-distributing, which meant that, theoretically, he could take his beer, which was never considered very good by members of his own team, directly to market instead of his distributors.
 
That $93,000 price tag River City placed on his brand might seem high. But why did he shut down 3rd Sign before that lawsuit ever made it to court? If the brand had the upside he alone seemed to think it did, it certainly would’ve behooved him to continue self-distributing until he was legally unable to do so. Alternately, he could have paid the $93K break-up fee, however unjust, and get to building his brand on the self-distro margins he would have enjoyed.
 
On one hand, we have a pending court case that could define a new precedent for small, independent brewers looking for more control over their distribution rights in a state where very few distribution companies control much of the business that gets done. On the other hand, we have a brewer blaming a distributor—who only controlled a small portion of their startup volume—for the death of what seems like a brand that seemingly never had a chance since the moment the first kettle was fired up.
 
Regardless, Showaki isn’t necessarily thinking of the brand’s relative prowess in quality or in the distribution channel. Instead, he claims he’s focused on what a favorable ruling might mean for brewers moving forward in Wisconsin, including his own ability to start new brands out of his contract hub.
 
“But as you know,” he adds, “there are no guarantees in the legal world.”
 
 A hearing is scheduled for August 4.
 
—Dave Eisenberg and Michael Kiser