Draught law: House easily passes beer franchise bill
Draft brewers are a commercial powerhouse in Vermont, with a collective economic impact that exceeds the maple syrup industry. But when it comes to renegotiating the terms of their contracts with distributors, brewers say they are hamstrung by decades-old franchise law.
A bill passed by the House last week seeks to change that by giving them significantly more negotiating power with distributors.
The existing statute requires brewers to have “good cause” for leaving a distributor, which can require them to spend hundred of thousands of dollars to make their case in court. And even then, if a distributor makes changes to address their grievances within 120 days of notice of termination, they must remain in the agreement.
“In effect, the small brewer is trapped, regardless of what its contract says and regardless of how poorly its brands are faring with the wholesaler,” said Marc Sorini, a food and beverage law attorney who gave testimony on the bill.
The rules were initially drafted in the 1970s to protect relatively small wholesalers from major national brewers who could manipulate the market with far superior financial and legal resources.
The beer landscape has turned upside down over the past few decades, as distributors have consolidated and brewers have multiplied. There are now four major distributors in Vermont and about 60 breweries.
The bill, H.710, is an attempt to reflect this shift by establishing a more normal contract law between small brewers and distributors. It would give brewers the ability to leave contracts without cause as long as they pay reasonable compensation.
The bill currently gives brewers and distributors until July 1, 2022, to negotiate a written franchise agreement that will lay out binding terms of their partnership.
The law would only apply to breweries producing less than 50,000 barrels of beer a year, meaning the major national brands would still be beholden to the old franchise rules.
Three breweries with operations in Vermont produce more than the 50,000 barrel threshold. Long Trail Brewing produced 131,000 barrels in 2016, according to data from the Brewers Association, a national trade group, while Harpoon, which has a brewery in Windsor, produced nearly 200,000 barrels. Magic Hat puts out 175,000 barrels each year.
The next largest Vermont-based brewers are Alchemist Cannery, which produced 13,500 barrels in 2016, and Fiddlehead Brewing, which produced 10,000.
Together, Vermont’s breweries produced 19.8 gallons of beer per adult resident, the highest in the country, according to the Vermont Brewers Association, which also estimates the economic impact of the industry at $376.7 million last year, including 2,000 jobs and $55 million in labor income.
Bret Hamilton, who founded Stone Corral Brewery with his wife in 2015, told House members of his own experience in the craft beer industry. He said that after two years with Farrell Distributing, he and his wife decided that they could better manage their brand and grow faster if they started their own distribution company.
“However, we had since learned that because of franchise law, our contract agreement with the distributor meant nothing in the eyes of the state,” he testified. “This was a frightening situation for us, being completely at the mercy of another company … and having no real option for timely legal recourse to remedy any shortcomings.”
He said that Stone Corral ended up amicably parting ways with Farrell, but that the experience left him with the realization that brewers were being “held to the mercy of the decency of a single individual” when it came to the future of their own business.
Clare Buckley, head of the Vermont Wholesale Beverage Association, offered a different perspective on the changes. In an interview last week, she said that Vermont’s thriving beer industry was a testament to the effectiveness of the existing statute.
“We feel strongly that the beer franchise law that was enacted 40 years ago works really well for Vermont. Part of that success has been that we partner with breweries and distribute their beer,” she said.
She said the current version of the House bill has undergone significant changes since it was proposed — notably a much lower threshold for breweries that would be exempted, from 300,000 barrels a year as introduced to 50,000 in the current version.
Buckley said she hoped that number would be lowered further as the bill is taken up in the Senate, noting that it would also apply to distributors’ relations with out-of-state producers.
In her own testimony to House members, Buckley said that brewers relied heavily on distributors for everything from employing and equipping a delivery force to providing refrigerated warehouses, marketing campaigns and setting up computer systems to track sales.
“Distributors are only willing to make that substantial investment, however, if they have assurance that a brewer cannot inequitably usurp that investment by terminating without notice, without an opportunity to cure and without good cause,” she said.
Avery Schwenk, president of the Brewers Association and vice president of Hermit Thrush Brewery, said some breweries had decided to do their own distribution or kept things small out of fear of entering into an agreement that they might not be able to exit.
But he said that most brewers ended up having great relationships with distributors. More than anything, Schwenk said, the new law would give brewery owners the same legal rights as most small business owners in other industries.
“It’s essentially just allowing us to leave a contract if it’s not working for us,” he said. “We’ll actually be able to negotiate. That’s the gist of it.”
Correction: Three breweries in Vermont produce more than 50,000 barrels a year, not one, as was stated in a previous version of this article.