South Portland Wine Co. Sues WX for Allegedly Violating Unfair Trade Practices Rules
February 05, 2019
A Maine alcohol distributor has filed a complaint in federal court against a California wine company for allegedly violating the New England state’s unfair trade practices rules. South Portland Wine Co. alleges Winery Exchange Inc., a company based in Novato, tried to wrest the brand Bread & Butter from the distributor, according to the complaint.
Maine is a franchise state, said a spokesman for the state of Maine’s Department of Administrative and Financial Services. Wineries have to select a wholesaler to distribute a wine brand. They need to establish “good cause” to terminate an agreement with the selected wholesaler under state law. South Portland Wine Co – or SoPo – in October 2013 became Bread & Butter’s exclusive Maine distributor when the brand was owned by Cult of 8. Sales of Bread & Butter increased from 55 cases in 2015 to more than 2,900 cases in August 2018, according to the complaint filed Jan. 21, 2019 in Maine.
A WX representative questioned in August 2018 if SoPo “was big enough to manage the Bread & Butter brand given the brand’s recognition and growth,” according to the complaint. The wine distributor, based in South Portland, responded it had provided “outstanding” service for the brand; that there had been no service complaints; and that there was “no basis for WX to question SoPo’s service,” according to the court filing.
The WX representative also asked at the meeting if SoPo would be willing to negotiate a price for the release of Bread & Butter to another distributor, Pine State Trading, according to the complaint. “SoPo, while not encouraging any such discussion, responded that if Pine State was interested in purchasing the Bread & Butter brand, Pine State should be in touch,” according to the court filing.
WX then allegedly retaliated against SoPo, according to the complaint, by announcing an immediate price increase in the FOB price per case of Bread & Butter. WX attempted to create a new brand by making “an imperceptible” change in the Bread & Butter label by adding “Winemakers Blend” and “using this as a springboard for qualifying Pine State to handle the so-called new brand,” according to the complaint.
The company allegedly transferred Bread & Butter (Winemakers Blend) Chardonnay and (Winemakers Blend) Pinot Noir to Pine State without a release as state law requires. WX provided Pine State a better price per case by furnishing the wholesaler “a higher depletion allowance than WX provided SoPo,” according to the court filing.
SoPo said it complained to Maine’s Bureau of Alcoholic Beverages and Lottery Operations that WX allegedly attempted to implement a price increase without first getting an approval from the state agency. “In response, (the Bureau of Alcoholic Beverages and Lottery Operations – or BABLO) required that WX maintain, consistent with BABLO regulations, its existing price until December 1, 2018," according to the complaint.
WX also slowed shipments and gave unreasonable performance expectations, according to the court document. Among other allegations, SoPo said WX fabricated good cause.
Peter Byck, founder and chief executive officer at WX Bottling, on Monday declined to comment on the case, saying WX does not comment on pending litigation. An attorney for So Po Wine Co. could not be reached to comment on the case.
Generally speaking, the Wine Institute has opposed franchise states provisions, calling them anti-competitive and anti-consumers. “They’re really monopoly protection laws,” said Tracy Genesen, vice president and general counsel for Wine Institute. Establishing good cause to terminate a wholesaler is a very high standard, Genesen said.
Suzanne DeGalan, partner, Hinman & Carmichael LLP in San Francisco, is not involved in the case but has written about “franchise” states for wine. Laws vary greatly among franchise states, she said. “There are anywhere from 18 to 21 franchise states for wine, depending on certain variables in three states and 13 for distilled spirits. Most states are franchise states for beer.”
“The original (and dubious) justification for these laws was to prevent large and powerful suppliers from withdrawing their brands to the detriment of distributors whose business relied upon the sale of those brands to survive,” DeGalan said. “Today, given the proliferation of suppliers and the consolidation of distributors, even this thinly veiled protectionist reasoning cannot be justified. For example, a distributor may have dozens – hundreds – of brands: the loss of a single brand will not bankrupt that distributor’s business in the way that a 'true' franchise, say a McDonald’s outlet, would be destroyed if the franchisor revoked the franchisee’s right to use the (in our example’s case) McDonald’s trademarks and thus put the outlet out of business.”
“Today distributors and their lobbying groups on both the federal and state levels pay Congress and state legislatures millions of dollars to keep in place protectionist legislation such as franchise laws,” DeGalan said.
A few franchise states require a threshold test be met—for example, that the sale of a supplier’s brands represent at least 25 percent of a distributor’s revenue—before a franchise can be established, she said. “Maine is not one of these states. In Maine, if you grant a distributor the right to sell your brand, you have established the franchise, period. The state imposes its burdensome, costly laws on all suppliers, regardless of size.
“The sad reality in franchise states is that suppliers with legitimate good cause to terminate a distributor usually end up paying off the distributor to avoid exorbitant legal battles in state courts that are favorable to the distributors. For that reason, franchise state distributors will never just ‘accept’ a good cause termination, but instead will always threaten – and initiate – legal action in the expectation of settlement,” DeGalan said.