Ohio seeks to join other states that have revised their existing “Franchise Act” laws to create a carve-out for smaller breweries. Currently, Ohio breweries, large and small, are restricted when it comes to their termination rights of a distribution contract.
The Ohio Alcoholic Beverages Franchise Act was passed in 1974 when an emerging duopoly and steep decline in regional breweries dominated the beer industry. The Franchise Act aimed to protect independent beer wholesalers from a large brewery terminating their distribution agreement with little to no notice. Such an event would devastate an independent beer wholesaler; therefore, the Ohio General Assembly, and many other states, pursued legislation to protect the interests of wholesalers within the state.
With the recent rise in popularity of independent craft breweries, along with the consolidation of many independent alcohol wholesalers, including buyouts by out-of-state private equity firms, many now question the broader utility of the Franchise Act, which has not changed in nearly 50 years, despite a very different dynamic in the industry today.
Many independent and small craft breweries are critical of the current law. They argue that it was intended to protect small wholesalers from large breweries, but now it is often used by large wholesalers to corner markets and cut out small breweries from certain territories. Perhaps it is telling that many breweries would prefer to use a distributor over a self-distribution model, but they frequently opt for self-distribution in order to retain control of their brand and avoid the concern of a wholesaler obtaining their rights and refusing to release the brand should sales decline.
Although Ohio breweries can provide notice of termination to their wholesalers for non-performance in accordance with the Franchise Act, the consequences can be quite significant. In such instances where an attempt to terminate is made, wholesalers will rarely prioritize sales of those brands and may stop ordering the products altogether. Because the period leading up to releasing the brands can take several months, there is almost always a high risk that retail accounts will be unable to buy the products from the wholesaler, and therefore will give the shelf space to another beer brand.
Further compounding this issue is that breweries cannot simply buy back shelf space as other industries can, as state and federal trade practice laws generally prohibit the practice. This can sometimes lead to a “chilling effect,” where breweries are afraid to even bring up performance concerns with their wholesaler out of fear the relationship could sour, and the brewery could lose invaluable shelf space as a result.
The proposed Ohio Craft Brewer Freedom Act would exempt smaller breweries that produce less than 250,000 barrels per year from the current termination restrictions, providing more room to negotiate distribution contracts. The proposed legislation, S.B. 138, can be found here.
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