Wine Law By the Case: Missouri – Front Line in Franchise Law Battles

If you’ve been following alcohol beverage news recently, you have probably read something about the franchise law battles that are raging, and Missouri has been one of the primary battlefields.

A number of states have a franchise distribution system that governs the relationship between suppliers (wineries, for example) and wholesalers. Under the franchise laws, the presence of a franchise relationship typically means the existence of certain protections for the wholesaler, including protections against termination of the relationship by the supplier unless there is good cause. The big question being hotly contested right now is what is necessary to create a franchise relationship.

Last year, the Court of Appeals for the Eighth Circuit turned a long followed definition of franchise in Missouri on its head and muddied the waters for determining the presence of a franchise.  The court basically added two more main requirements to the definition of a franchise: 1) a grant by the supplier of a license to use a trade name, trademark, service mark or related characteristic; and 2) a ‘community of interest” between supplier and wholesaler. This issue is currently being litigated in Missouri state courts and federal courts in Missouri, Florida and Connecticut.

It was also the source of legislative efforts the last two sessions in Missouri, which did not result in a change in Missouri’s franchise statutes. In addition, in 2013, a carve-out for small wineries, defined as those selling less than ten thousand cases of wine in the state in the twelve months immediately preceding the date the wholesaler receives notice of termination, made it into a bill. This language would have removed small wineries from the good cause for termination requirement and allowed them to move their products more easily. The legislation did not pass, though.

So, from a legal perspective, what does all of this mean for small to medium size wineries going forward? It is being suggested that what happens in Missouri will have ramifications for the rest of the country. However, the possible implications vary by the players, their location, their history, and the content of any agreement, oral or written, between a supplier and wholesaler.

For example, if an agreement between a supplier and wholesaler provides that the parties are governed by a state’s franchise laws or requires termination only for good cause, then the wholesaler may enjoy those protections without the need to further analyze the presence of a franchise relationship.

If the agreement does not have those provisions, then it is possible other provisions in the agreement may help in the analysis of whether there is a community of interest or trademark grant. The court in the above case suggested that the test may include whether a wholesaler’s investments were substantially franchise specific and whether the wholesaler was required to make the investments by the parties’ agreement or the nature of the business. In the end, the conclusion will depend heavily on the facts and the absence of case law raises more questions than answers.

In a direct ship situation, the franchise laws would not have any direct applicability to a winery shipping to customers. And, of course, if there is no applicable franchise law, then such issues are of no concern. Conversely, though, when working through a wholesaler in a franchise law state, wineries will need to be aware of the franchise laws and the potential liability for violating them, which could be substantial. The action in Missouri has certainly brought these issues into the spotlight, and it may hold the answers to how the game will be played in the future.

So, keep an eye on Missouri, as it will very likely set the stage for the fate of franchise laws in other states.

Jamie J. Cox, is an associate with the law firm Brydon, Swearengen & England P.C. in Jefferson City, Missouri. Jamie practices primarily administrative law and represents professionals before the Administrative Hearing Commission, as well as a number of Missouri licensing boards.