A brewery must exercise control of its product in Ohio to be subject to the Ohio Alcoholic Beverage Franchise Act
In a recent case interpreting the Ohio Alcoholic Beverage Franchise Act (Franchise Act), the United States Sixth Circuit Court of Appeals held that “when a brewery exercises no control over its product in Ohio, it’s not subject to the state’s franchise laws.” Cavalier Distributing Company, Inc. v. Lime Ventures, Inc., 2002 WL 9052002 (6th Cir., December 28, 2023). The court’s holding centered on whether the person who produced the beer qualified as a “manufacturer” under the Franchise Act, which would then trigger the protections of the Franchise Act.
The facts are relatively straightforward: Cavalier Distributing Company (Cavalier) is an alcoholic beverage distributor in Ohio that distributed Belgian beer produced by two Belgian microbreweries (the Breweries). Cavalier did not have a written franchise agreement with the Breweries. Shelton Brothers was an importer who had an agreement with the Breweries in which it would purchase and import their beer into the United States. Shelton Brothers, without the Breweries’ direct oversight, was responsible for marketing the beer and selecting the distributors that were to sell it. Shelton Brothers entered into an exclusive distribution contract with Cavalier. Shelton Brothers eventually ran into financial problems and filed bankruptcy.
After Shelton Brothers’ bankruptcy, Lime Ventures, Inc. (Lime) purchased Shelton Brothers’ inventory and obtained the right to be the Breweries’ new importer, replacing Shelton Brothers. However, Lime and Cavalier were not able to finalize a distribution agreement between themselves and Lime decided to move forward with a different Ohio distributor to distribute the Breweries’ beer. Cavalier subsequently sued Lime arguing that Lime improperly terminated Cavalier’s franchise with the Breweries in violation of the Franchise Act. As part of the lawsuit, Cavalier sought a preliminary injunction to bar Lime from selling the Breweries’ beer to other distributors in Ohio. The district court denied the preliminary injunction motion, and Cavalier appealed.
The Sixth Circuit had to first determine which party – Shelton Brothers or the Breweries – had a franchise with Cavalier that would trigger the Franchise Act’s termination restrictions. The Franchise Act applies to a “manufacturer” of an alcoholic beverage if such person “manufactures or supplies alcoholic beverages to distributors” in Ohio. If the Franchise Act applied to the Breweries, then Cavalier could argue that certain restrictions could be placed on the Breweries such that they could not unilaterally terminate a franchise without cause.
In this case, Cavalier and Lime disagreed over which person was the “manufacturer” subject to Cavalier’s franchise. Cavalier argued that the Breweries “manufacture” the beer, while Lime contended that Shelton Brothers “supplied” alcoholic beverages to the distributors in Ohio. In its analysis, the Sixth Circuit reviewed the Franchise Act and case law for provisions that are determinative of a franchise arising between a distributor and the party that controls the brand. The Sixth Circuit cited several provisions in the Franchise Act that govern franchises, including: (1) selecting Ohio distributors, (2) imposing requirements on those distributors, (3) managing distributors’ orders, and (4) requiring distributor participation in advertising campaigns.
The court found that those factors were applicable to Shelton Brothers, not the Breweries. For example, Shelton Brothers selected distributors without the Breweries’ input. Shelton Brothers was Cavalier’s point of contact for the beer and had the distribution agreement with Cavalier. Cavalier ordered shipments of beer directly from Shelton Brothers, which owned the imported beer. Moreover, Shelton Brothers – not the Breweries – was the party who advertised the beer in the United States. The court also found that Cavalier personnel never even interacted with the Breweries prior to Shelton Brothers’ bankruptcy.
The fact that the Breweries changed their United States importers from Shelton Brothers to Lime also did not change the court’s analysis. The Sixth Circuit sided with existing precedent which holds that a franchise applies to the party that owns and controls the beer brand in Ohio and took into account which party owns the intellectual property, conducts product marketing, chooses distributors, and makes business decisions for the product. Because the Breweries did not actively direct brand development, marketing, or distribution in the United States, the Sixth Circuit determined that the Breweries “controlled” nothing about their beer brands in Ohio.
Simply being the party that brews the beer was not enough to exert control over the beer brand. The Sixth Circuit determined that the control test did not hinge on which person originally makes the product; but rather who controls the physical product as it moves through the market in Ohio. In this case, the court found that Shelton Brothers designed the labels; controlled the marketing in the United States; and had input on beer recipes. Moreover, the court found that various distributors—including Cavalier— even marketed the beers as “Shelton Brothers brands.” Shelton Brothers also maintained exclusive control over distribution decisions and the flow of product in the United States.
As such, the Sixth Circuit found that the franchise existed between Cavalier and Shelton Brothers – and not between Cavalier and the Breweries. Therefore, the Court determined that Cavalier would not be successful in its litigation against Lime for violations of the Franchise Act. The Sixth Circuit was clear, however, to state that it was not holding that franchises “never” apply to foreign breweries under the Franchise Act, but only that a brewery who exercises no control over its product in Ohio would not be subject to the Franchise Act.
Because this was an appeal of a preliminary injunction, the Sixth Circuit left open the door (slightly) that additional facts may come to pass during the underlying litigation that could ultimately lead to a different interpretation at trial. For example, maybe Cavalier could provide additional facts showing that the Breweries exercised a greater degree of control over the brands or argue that Lime could be deemed a “successor manufacturer” to Shelton Brothers (such that Lime assumed Shelton Brothers’ franchise obligations). But those issues were not before the court in the appeal.