California Business and Professions Code Section 25000.2: Proposed Improvements to the Brand Transfer Law By: Mark Slater

Posted by on Jul 20, 2016 in News | No Comments
California Business and Professions Code Section 25000.2: Proposed Improvements to the Brand Transfer Law By:  Mark Slater

 

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Everything changes.

In 2007, the California Beer and Beverage Distributors (CBBD) sponsored Senate Bill 574, which the California Legislature finally codified as section 25000.2 of the California Business and Professions Code, known as the Brand Transfer law.2 This law contemplates that, when a successor beer manufacturer cancels the distribution rights of an existing beer wholesaler and nominates a successor beer wholesaler, the successor will pay the fair market value of the cancelled distribution rights to the displaced wholesaler.3 Fair market value is determined first by negotiation between the successor and cancelled beer wholesaler, and failing that, by prompt, mandatory arbitration.4 California’s statute is similar to brand transfer laws in in Kentucky, Illinois, and Wisconsin.

While the California Legislature passed Section 25000.2 in anticipation of the Miller/Coors combination, recent events have raised the stakes for brand transfers under Section 25000.2 even higher. In 2015, for example, the beer industry saw major combinations, such as Firestone’s merger with Duvel and Heineken’s purchase of half of Lagunitas for $500 million. Constellation thereafter acquired Ballast Point Brewing, reportedly for $1 billion.

Even those major acquisitions pale before the largest ever merger in the brewing business—AB InBev’s acquisition of SABMiller. What form the new entity will take, and what components might be divested or recast, remains unknown. Distributor displacement in the new world order seems inevitable.

So back to Section 25000.2. Does it work? Yes, but it needs work. This article suggests four changes: 1) eliminating redundant proceedings; 2) clarifying the statute’s definition of fair market value; 3) adjusting the statute’s timing for the payment of fair market value under an arbitration award, and 4) establishing a different standard of review on appeal.

At Present, Section 25000.2 Multiplies Rather Than Reduces Litigation

In a letter to the Governor’s Deputy Legislative Secretary, CBBD claimed, “SB 574 will end brand transfer litigation to the economic benefit of both brewers and California beer distributors and stop the economic loss caused by time consuming and costly litigation.”5

The opposite has happened. At present, Section 25000.2 multiplies proceedings. Initiating a brand transfer under Section 25000.2 potentially results in two pieces of litigation—a lawsuit and a statutory arbitration. For example, when Miller and Coors merged in to MillerCoors in 2008, MillerCoors replaced then existing wholesalers, Maita Distributors, Inc. of San Mateo and Mussetter Distributing, Inc., with DBI Beverage Inc.6 Maita reluctantly participated in the mandatory arbitration with DBI after an unsuccessful attempt to enjoin the arbitration, and challenged the idea that the arbitration could provide the sole remedy for termination of the distribution rights.7 At the same time, Maita filed another lawsuit against DBI, challenging the applicability and constitutionality of Section 25000.2 and again sought to enjoin the arbitration.8 Mussetter pursued a similar path.9 Another example of a brand transfer creating multiple proceedings is the action currently pending in the Los Angeles Superior Court, Mission Beverage Company v. Pabst Brewing Company, LLC, et al., LASC case no. BC578821.

Without a concrete statutory statement that Section 25000.2 is the sole remedy for a brand transfer11, the statute is a perfect failure of the stated legislative intent.

Other states take this sole-remedy approach. Both Indiana and Kentucky’s brand transfer statutes provide that mandatory arbitration is the only remedy available to the cancelled wholesaler.12 Though Section 25000.2 is modeled on these Indiana and Kentucky laws, which CBBD considered “highly workable, efficient and equitable,” it fails to expressly state that arbitration under its provisions is the only remedy available to the cancelled distributor.13 Amending Section 25000.2 so that it tracks its sister-states’ laws in Kentucky and Illinois will bring it in line with its original purpose of reducing brand transfer litigation.14

The Determination of “Fair Market Value” Should Follow Industry Custom and Practice

There has been significant litigation and controversy over what “fair market value” means as used in Section 25000.2. The statute does not define “fair market value.” Instead, the statute merely sets forth what “fair market value” includes. Industry custom and practice is a reliable guide, and the definition was clarified in a helpful ruling following a Section 25000.2 arbitration.15

Distributors are smart and knowledgeable. They know the value of their brands, and they know the industry standard for valuation, as brands frequently change hands. The typical tool is a multiple of trailing twelve-month’s gross profit as the formula to determine fair market value in almost every market transaction. Section 25000.2’s fair market valuation should follow industry practice by using the same formula. Moreover, Section 25000.2 should emphasize that the compensation awarded is the fair market value of the brand.

At present, in Section 25000.2 arbitrations each side is incented to exaggerate, or interject improper theories of contract damages. Nonsense valuations should have consequences. Section 25000.2 could, for example, incorporate a “baseball arbitration” provision, where each party submits a number to the arbitrator and the arbitrator picks one of the submitted numbers. This approach would help make brand transfers less expensive and painful, while promoting settlement and fair compensation. Awarding costs to the prevailing party would further encourage parties to be reasonable.16

Award Payments Should Be Flexible, and Transfer of Account Information Should Follow Industry Practice

Section 25000.2 requires payment no later than 10 business days after the service of the statutory arbitration award.17 But it needs to be amended to better follow industry practice, and should be harmonized with the appellate rights.

First, the statute should allow the parties to stipulate to a longer payment deadline, and second, the statute should be amended to track industry practice in brand transactions, which always include account information as part of a brand transfer. Section 25000.2’s payment provision should address the need for up-to-date and accurate account information for the brand from the displaced wholesaler, and require it to be provided contemporaneously (at latest) with the payment, so that product can flow uninterrupted.

Additionally, the statute is ambiguous about payment obligations pending appeal. While payment is required within ten days, the statute also permits an appeal within ten business days of the service of the arbitration award.18 However, it is unclear whether the successor wholesaler must make payment if there is a pending appeal. Subdivision (g) provides that if the successor wholesaler fails to make payment within 10 business days, and if no appeal is pending the existing wholesaler may keep its distribution rights.19 This potentially creates a circumstance where payment must be made before a pending appeal is resolved.

Bright lines are better. Payment should not be due until after the appeal period has lapsed, and if an appeal is filed, no payment should be required until the appeal is fully resolved.

Use the Standard of Review on Appeal Governing Other Arbitrations

Section 25000.2 states that, on appeal, the court shall review the arbitration award for errors of fact or law by determining whether the award is supported by the sufficiency of the evidence presented at the arbitration.”20 Section 25000.2 should be amended to provide for either 1) no appeal at all; or 2) appellate review under the standards set out in the California Arbitration Act.

Most states grant trial courts limited (if any) power in reviewing a brand transfer arbitration. In fact, Kentucky, Indiana, and Colorado explicitly prohibit such appeals.21 Those states that allow appeals employ the standard of review for appeals of contractual arbitration awards and limit the grounds of review of an arbitration award to challenges of misconduct or bias on part of the arbitrator, or omission of material evidence.22

California Code of Civil Procedure section 1286.2(a), part of California’s Arbitration Act, provides similarly limited grounds for vacating an arbitration award.23 This standard should apply to appeals from Section 25000.2 arbitrations as well, particularly because the legislature acknowledges that both parties are sophisticated and neither is at a disadvantage in the arbitration.24

Section 25000.2 is paved with good intentions, but these amendments are essential to bring the statute better in line with its stated goals.

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1 Mark Slater is a partner of Slater Hersey & Lieberman LLP. He served as lead counsel for the Maita, Musseter, and Classic/Beauchamp decisions referred to herein. He gratefully acknowledges the assistance of his colleagues Elise Sara and Junyong Huang in preparation of this article. The views expressed in this article are his own and not necessarily those of any firm client or other person or entity.
2 Assembly Com. On Gov. Org., Analysis of SB 574 (2007-2008 Reg. Sess.) as amended August 27, 2007 at p. 3.
3 Cal. Bus. & Prof. Code §§ 25000.2(a)(9), (d).
4 Id. §§ 25000.2(d), (f).
5 Maita Distrib. Inc. of San Mateo v. DBI Beverage Inc., 667 F. Supp. 2d 1140, 1147 (2009). https://casetext.com/case/maita-distributors-inc-v-dbi-beverage
6 Id. at 1143.
7 Id. at 1144.
8 Id.
9 Mussetter Distrib. Inc. v. DBI Beverage Inc., 685 F. Supp. 2d 1028, 1030 (2010). https://www.courtlistener.com/opinion/2569433/mussetter-distributing-inc-v-dbi-beverage-inc/
11 An express statement in contracts acknowledging Section 25000.2 would address the issues the court identified in Maita.
12 IC § 7.1-3-25-11 (“The arbitration is instead of all other remedies and procedures.”); KRS § 244.606(2)(h) (“Any arbitration held pursuant to this subsection shall be instead of all other remedies and procedures.”).
13 Assembly Com. On Gov. Org., Analysis of SB 574 (2007-2008 Reg. Sess.) as amended August 27, 2007 at p. 3.
14 See Maita 677 F. Supp. 2d at 1147 (“SB 574 will end brand transfer litigation to the economic benefit of both brewers and California beer distributors and stop the economic loss caused by time consuming and costly litigation.”).
15 Beauchamp Distributing Company and Classic Distributing & Beverage Group, Inc. v. Mission Beverage Company, JAMS Arbitration Reference No. 1220050508 (2015). Arbitration Ruling Classic & Beauchamp vs. Mission
16 Id.
17 Cal. Bus. & Prof. Code § 25000.2(g). Indiana, Kentucky and Wisconsin all provide a 30-day payment period. IC § 7.1-3-25-13; KRS § 244.606(2)(l); W.S.A. § 125.33(10)(d).
18 .Cal. Bus & Prof. Code § 25000.2(f)(5).
19 Id. § 25000.2(g).
20 Id. § 25000.2(f)(5).
21 KRS § 244.606(2)(j); IC § 7.1-3-25-12(b); CRS § 12-47-406.3(4)(c)(VII).
22 See, e.g., VTCA, Civil Practice & Remedies Code § 171.088(a); UCA 1953 § 78B-11-124(1); 12 Okl. St. § 1874(A).
23 Cal. Code Civ. Proc. § 1286.2(a).
24 Cal. Bus. & Prof. Code § 25000.2(f)(10)(A).