Update, June 30, 2021: Jack's Abby Craft Lagers announced today it has a new Massachusetts distributor, the Sheehan Family Companies (Craft Brewers Guild Of Boston, L. Knife & Son and Seaboard Products). The brewery and its affiliate, Springdale Beer Co., have exited their distribution agreements with Atlantic Beverage and have completed arbitration proceedings. As Brewbound has reported, members of the Sheehan family and their affiliated businesses are currently involved in a legal dispute in Massachusetts’ Suffolk Superior Court.
Update 4/7/2021: As expected, Atlantic Importing Company last week sued Jack’s Abby Craft Lagers in an effort to block it from leaving its distribution agreement with Atlantic. Law360 reports that on April 6, a Massachusetts judge expressed skepticism that Atlantic could show Jack’s Abby has caused the wholesaler “irreparable harm.” This hints that the Suffolk Superior Court is unlikely to grant Atlantic’s request to block the arbitration proceedings between Jack’s Abby and Atlantic—which would be a win for the brewery.
THE GIST
Last summer, Massachusetts craft breweries and beer distributors cheered their compromise on franchise law reform, which went into effect on Jan. 12. The legal update resolved a decades-long rift between the two groups. Or it was supposed to, until the conflict flared up again just three months later.
A challenge filed March 1 by Atlantic Importing Company with the state’s Alcoholic Beverages Control Commission (ABCC) threatens to undo the progress made by the franchise law reform. The challenge asserts that the Framingham, Massachusetts-based brewery Jack’s Abby cannot exit its distribution contract with Atlantic, which the brewery sought to do on Jan. 14. (As a result of franchise law reform, breweries that produce fewer than 250,000 barrels annually are legally able to leave their distributor at will, with 30 days’ notice, by paying fair market value for their distribution rights.)
After Atlantic laid off a third of its sales staff in 2020, Jack’s Abby co-owner Sam Hendler says there was a “breakdown” in communication from Atlantic owner Sean Siegal, who refused to meet with or talk to Hendler to address concerns over the layoffs. In January, those tensions came to a head, and Jack’s Abby told Atlantic of its intent to leave the distribution agreement and self-distribute its beer while it finds other Massachusetts wholesale partners.
Hendler says the situation is “a test case” for the viability of the state’s franchise law reform. At stake is the balance of power between breweries and the companies who distribute their products.
Atlantic’s challenge argues that not only can Jack’s Abby not break its agreement, despite the brewery doing exactly what the new law allows for, but that the state’s hard-fought franchise reform is unconstitutional. If found successful, it would render decades of negotiation and compromise between Massachusetts distributors and brewers moot. Some of the biggest names in the state, like Jim Koch—founder of Boston Beer Company, which makes Samuel Adams—contributed to the conversations that led to the reforms.
The outcome of Atlantic’s challenge to the ABCC would not only have implications for the state’s small breweries, but, as Hendler says, any precedent could have ripple effects nationally for other distributors looking to fight new laws. Neither Atlantic nor trade group Beer Distributors of Massachusetts responded to Good Beer Hunting’s requests for comment.
WHY IT MATTERS
How the ABCC rules on Atlantic’s challenge will potentially change the calculations Massachusetts breweries make in contracts with their distributors—or influence whether they enter into them at all. It’s the first case to test not just the details of franchise law reform in Massachusetts, but whether that reform is legal, period.
“The main issue now is Atlantic is claiming that the statute is unconstitutional. If they’re ever successful on that, which we don’t believe they will be, then the rest of it won’t really matter,” says John Connell, a partner at Upton Connell & Devlin, LLP in Boston who is representing Jack’s Abby in these proceedings.
Because the state’s updated franchise law is so new, Connell says some gray area was inevitable. Yet neither he nor Hendler expected the law to be challenged on its face. He adds that almost every statute in Massachusetts law—from employment discrimination to consumer fraud—has been litigated to define its parameters, its exceptions, its particulars. He wouldn’t expect franchise law to be any different.
“It’ll be years before there will be a stable body of case law surrounding this statute,” Connell says. “But we’re hoping that if we’re one of the first cases, we can add some, perhaps, stability and clarity to the purpose of this statute, which was to allow craft brewers the option to get out of their distributorship.”
Connell says case law (i.e., further lawsuits) will eventually develop to clarify the applicability, scope, meaning, and interpretation of franchise law reform. But what’s before the ABCC is something much more existential: whether that reform is even valid.
Franchise law reform in the Bay State had buy-in from both the Massachusetts Brewers Guild and the Beer Distributors of Massachusetts, and was touted as critical to the survival of the state’s smallest breweries during COVID-19. It also represented a compromise between the state’s smallest and largest breweries, as breweries who produce more than 250,000 BBLs of beer annually agreed to exempt themselves from the reform.
Now, with the future of these compromises again up for debate, there’s a sense of weariness on behalf of many breweries. Separately, Brewbound reports flavored malt beverage maker Loverboy is also engaged in a dispute with its Massachusetts distributor, Night Shift Distributing, over compensation following a termination of its contract.
Katie Stinchon, executive director of the Massachusetts Brewers Guild, told GBH via email that she had hoped any legal arguments around distribution rights were “put to rest” after successful negotiations. She says that this acrimonious phase “highlights the imbalance that has worked against the craft beer industry for years.”
The challenge undoubtedly puts the Beer Distributors of Massachusetts in an awkward position: The trade group celebrated the January franchise law reform bill, saying it would “facilitate further growth and promote the health of the beer industry across the United States.” Yet now one of the state’s beer distributors is moving in direct opposition to the group that represents them, arguing this reform is unconstitutional. (Atlantic is not a member of the Beer Distributors of Massachusetts.)
Hendler says he’s heard from numerous breweries in other states, primarily in New England, who are watching how Atlantic’s challenge unfolds.
“Am I paying attention to it? Yes,” says Derek Selznick, executive director of the Kentucky Guild of Brewers. Kentucky Governor Andy Beshear on Mar. 18 signed SB 15 into law, a piece of legislation that includes self-distribution for small breweries as well as franchise law reform. “I try and keep abreast of litigation and legislation across the country when it comes to the beer industry. … Any time you bring forth a new piece of legislation, that also brings with it the threat of litigation.”
Seeing how protracted and legally involved the process is could dissuade breweries from leaving their distributors, Hendler says, even if they have the legal right to do so.
Franchise law reforms nationally have sought to modernize states’ beer distribution laws, many of which are vestiges from the Prohibition era. Updating such laws has gained momentum in recent years as state legislatures have seen the financial benefit of supporting small businesses, which generate tax revenue and attract tourists. Prior to franchise law reform, small breweries were often locked into lifelong distribution contracts; now, those can be severed via an arbitration process. But this is still costly: Breweries (or their new wholesalers) must pay fair market value for the brand rights, to say nothing of the time and legal fees associated with arbitration.
Asked whether Atlantic has filed its challenge as an intimidation tactic to discourage other small breweries from leaving contracts, Hendler acknowledges “it might be.”
Currently, the dispute is playing out on at least two battlefields: Atlantic has filed a petition (essentially, a lawsuit) to the ABCC, and has filed a motion with the American Arbitration Association (AAA). That’s because under the Massachusetts law passed in January, breweries who could not agree with their distributors on fair market value would determine that value via arbitration. Jack’s Abby and Atlantic are still engaged in the arbitration process, but Atlantic has filed a motion to have that arbitration proceeding dismissed. Hendler says he’s also heard, from friends in the state’s beer industry, that Atlantic is considering suing the brewery in Massachusetts’ Superior Court, adding a potential third ring of the legal circus.
For any small brewery watching this saga, the message is pretty clear: Leaving your distribution contract could involve a lengthy and costly fight. Historically, that’s been the case, but eliminating such protracted disputes was what franchise reform was designed to do.
“[Franchise law reform] was supposed to be pretty simple, and was supposed to avoid the chaos that’s ensued where we don’t know if and when we’ll be able to get out [of our contract],” Hendler says. “Chaos now reigns. At its core, that’s what this was supposed to fix.”
Indeed, the reform was designed to make brewery-distributor relationships easier to dissolve. Speaking in 2017 in favor of such reform, Boston Beer Company’s Jim Koch reportedly told a group of journalists that, “It’s easier to get out of a bad marriage than a bad wholesaler relationship.”
With Hendler still calling his brewery’s relationship with Atlantic “toxic,” franchise law may not have changed Koch’s analogy as much as the state’s beer industry had hoped.
Words by Kate Bernot