Dear Client:
Here is a roundup of all of our issues to-date of the MillerCoors lawsuit against Chesbay blocking their sale to Reyes Holdings:
REYES TO BUY CHESBAY
August 31, 2012
Reyes Beverage Group has entered into an agreement to acquire 6 million case Chesbay Distributing Company from the Sampson family. Chesbay operates in Chesapeake, Virginia, carrying MillerCoors, HUSA, Crown Imports, Boston Beer, Pabst, Yuengling and Mike's Hard Lemonade brands among others. Chesbay was one of the first (if not the first) distributor to put in Vertique racks. That puts Reyes at around 105 million cases (including Crest Beverage in San Diego which is a J-V).
DENIED!
September 13, 2012
This certainly is a change of pace. After years of relative quiet from MillerCoors in the wholesaler approval front, it has emerged late last night they have filed a motion in federal court in Virginia to block Reyes Beverage Group's pending purchase of 6 million case Chesbay Distributing Company from the Sampson family. Chesbay operates in Chesapeake, Virginia, carrying MillerCoors, HUSA, Crown Imports, Boston Beer, Pabst, Yuengling and Mike's Hard Lemonade brands among others.
"We are exercising our right of first refusal to purchase Chesbay Distributing in partnership with an entity affiliated with Jeff Honickman because we think it is in the best interest of our brands to do so. Our distributor agreement provides MillerCoors a contractual right of first refusal. We feel strongly about determining the destiny of our brands and feel compelled to fight for our brands. Taking an ownership take in a distributorship is consistent with our Three-Tier System Doctrine provided that brewery ownership is permissible under state law, as is the case in Virginia."
That's a big step from MillerCoors which has more recently, since 2008 really, approved such big distributor consolidations such as Glazer's purcahse of Halo in San Antonio; and now the Mertigage purchase of Columbia in the PacNorwest is also pending. It also introduces a sort-of quasi-branch into Virginia.
Honickman is a partner is several MC distributorships, including being equal partners with Dominic Origlio in Philadelphia, equal partners with Simon Bergson in Manhattan Beer, and partners with both in distributorships in New Hampshire and Arizona (and Origlio in Jersey), and have been longtime Pepsi bottlers in the Northeast. They are also, like the Reyes, well-capitalized.
This seems to be a blow to the Reyes' organization, the largest beer distributorship in the country (not including A-B branches) and certainly MillerCoors' largest at over 100 million cases. Will there be a fight? Stay tuned...
MILLERCOORS: IRREVOCABLE RIGHT OF FIRST REFUSAL
September 13, 2012
In its complaint against Chesbay in blocking their pending sale to Reyes obtained by BBD, MillerCoors points to its distributor agreement (the same agreement the Virginia ABC had trouble with in 2009, see below). Specifically, in arguments to the US District Court for the Eastern District of Virginia, it points to Section 8 which gives MillerCoors the right to approve a buyer and the "irrevocable right and option to purchase that portion of the Distributor's business that is the subject of the Letter of Intent upon those terms and conditions and for the purchase price ... contained in such Letter of Intent..... and assign any or all of its rights.... to a third party of its choosing."
Problem is, MillerCoors says that Chesbay didn't execute a Letter of Intent, but went straight for the Purchase Agreement stage, which said it would exclusively negotiate with Reyes and is binding. MillerCoors says that itself is contrary to their Distributor Agreement, and says Chesbay is therefore in breach of contract. On September 12, MillerCoors exercised its first right of refusal and assigned OHMC, LLC to purchase Chesbay (OHMC being the entity jointly owned by MillerCoors and Jeff Honickman).
MillerCoors seeks a declaratory judgment that it has a "valid and enforceable right of first refusal" and that Chesbay has "breached the Distribution Agreement", calls upon the court to honor MillerCoors' right to "terminate the Distributor Agreement... and be awarded any damages, fees, and costs that it may incur as a result" plus attorney's fees etc.
BACKGROUND:
NOT FIRST RODEO. You will recall that MillerCoors had made a run at keeping Reyes from buying central Florida's blue-silver distributor, Schenck. MillerCoors had tried to cobble together a coalition of groups to negotiate with Schenck after Reyes made it known that it was negotiating with the company. But when it became apparent that no deal would be forthcoming, Schenck was notified by MillerCoors before the deadline that it was free to seek out another deal, and ultimately the Reyes offer stood alone and they closed the deal.
VIRGINIA BACKGROUND. Recall that back in 2009, the Virginia ABC joined regulators in California, Nevada, Texas and Michigan in voicing concerns about certain provisions in MillerCoors new 2008 distributor agreement, which Reyes had famously refused to sign at the time (see BBD 05/21/2009 ). The Virginia ABC sought "assurance from MillerCoors LLC that it will not seek to enforce the provisions of the Distributor Agreement detailed above with respect to Virginia wholesalers." One of the problems Virginia had with the MillerCoors contract involved the the brewery approval process for selling a distributorship. Virginia distributor attorney Walter Marston wrote to distributors at the time that "the VBWA may be able in the future to dialogue with major breweries and obtain informal understandings regarding the application of Virginia law to their distribution agreements. At the very least, major breweries can no longer safely assume that they will not be challenged when they issue one-sided, unreasonable contracts to Virginia beer wholesalers."
FRANCHISE LAW. In any case, Virginia franchise law doesn't allow for brewers to withhold approval "unreasonably", and Virginia law is thought to supersede the Distributor Agreement.
And then you have Chesbay's other major suppliers to consider: Crown Imports, Heineken USA, Boston Beer, Pabst, Yuengling, Mike's, and others. How will they feel being bought out by an entity with an ownership stake -- albeit temporarily -- by MillerCoors?
Also, Virigina does allow a brewery to temporarily own a non-controlling stake in a distributorship, so MillerCoors is qualified to own at least for a while. A source indeed tells BBD that their stake in the Honickman venture in Virginia would be temporary, and that this stake was in response to matching Reyes' offer, which was likely higher than Honickman would prefer to pay alone due to the synergies Reyes could muster having considerable other distributorship assets in the area.
MC GETS TEETH AGAIN. Those 2008 contract days, and the terminations which occurred after the Miller and Coors merger at the time in certain states, created some strain in the system, which has since alleviated. Will Reyes turn and fight? Judging from Virginia franchise law and the VA ABC's public stance, it seems like at first blush they'd have a decent chance in court. We'll see.
BREAKING: CHESBAY FIGHTS BACK
September 18, 2012
After MillerCoors denied Reyes Beverage Group the right to purchase Chesbay Distributing in Virginia and seeks to terminate Chesby due to alleged violations of their distributor agreement (see BBD 09-13-2012), we knew Chesbay would fight back based on Virginia's strong franchise laws, and indeed they have.
First, in a letter to the Virginia Alcohol Beverage Control, Chesbay's counsel Walter Marston writes that MillerCoors' block and delay of the sale to Reyes will "cause extraordinary harm, due to the 'fiscal cliff' that looms on January 1, 2013." (Presumably he's talking about the increase in capital gains tax). Time is of the essence, and the question to Chesbay is: Who can decide the issues on this case more quickly: the VA ABC or the federal court? Remember, MillerCoors' complaint is a simple breach of contract case, which is governed by state law.
"The question facing Chesbay Distributing Company is whether Virginia ABC is capable of resolving the state law issues promptly or whether it would be better to let the federal court decide the state law issues. I am inclined" writes Walter, "to ask the federal court to abstain but expeditious resolution of the issues is important." In other words, if the VA ABC can expedite this case, they can possibly save some time.
So Chesbay has filed a complaint against MillerCoors before the Virginia ABC, which makes several claims:
1. Unreasonable delay. Chesbay says MillerCoors has dragged its feet, and as a result, "a decision is no closer to taking place now than it was on May 3, 2012" when Chesbay submitted notice to MillerCoors of its intent to sell.
2. Failure to comply with mandatory decision standard. Chesbay says MillerCoors uses their distributor agreement (famous Article 8) to "evade the mandate . of the Beer Franchise Act constitutes a violation of that section. A brewery may not seek to override and take hostage the sale process using the devices that MillerCoors has unilaterally created for itself."
3. Illegally exercising authority beyond that conferred by VA franchise law. The Virginia beer code "does not permit a brewery to attempt to gain control of a beer distributor or to attempt to exercise a claimed right to purchase a beer distributor."
4. Attempting to exercise privileges available only to a licensed beer distributor.
Chesbay requests that the agency find that MillerCoors has violated Virginia law for the four top claims.
Here's a timeline of the Chesbay - Reyes deal:
May 3, 2012 - Chesbay gives MillerCoors a notice of intent to sell.
May 10, 2012 - MillerCoors vp distributor and sales services Tim Owston responds and writes that MillerCoors "hereby elects to exercise its right to negotiate exclusively for itself and its future assignees with Chesbay Distributing Company for the purchase of your business", and assigns the right to negotiate with Meritage Group (who has a deal to buy Columbia Distributing).
May 10, 2012 - Chesbay starts negotiating with Meritage, which Chesbay calls "a Connecticut-based investment firm with no prior beer industry experience." The negotiations go on for 90 days.
August 8, 2012 - Chesbay tells MillerCoors that they don't have a deal with Meritage, and then starts negotiations with Reyes. During these negotiations, "MillerCoors proceeded to channel other potential purchasers to Chesbay," which included JJ Taylor and Honickman/Bergson/Origlio. "None of them were able to produce an offer that equaled, much less exceeded, the offer that was on the table from Reyes Holdings."
August 28, 2012 - Chesbay and Reyes execute an Asset Purchase Agreement.
August 30, 2012 - Chesbay notifies Tim Owston that they have concluded successful negotiations with Reyes.
September 6, 2012 - Tim advises Chesbay that it has breached its contract with MillerCoors because it had entered into a binding purchase agreement.
September 12, 2012 - Tim writes a letter to Chesbay that MillerCoors is exercising its right of first refusal and is assigning its purchase right to OHMC LLC, a joint venture between MillerCoors and Honickman/Bergson/Origlio. MillerCoors files suit in federal court alleging breach of contract.
CHESBAY'S DILEMMA
September 20, 2012
Several readers have asked why Chesbay is fighting MillerCoors on the sale of their distributorship when the joint venture approved by MillerCoors is matching Reyes offer? The devil is in the details. One of of the things that complicates matters is that there is no guarantee that other suppliers would approve the deal, particularly if MillerCoors is a partner (even if only for 180 days). In particular, Crown and Yuengling are wild cards in that transaction, we're told. Without Yuengling alone, the deal becomes harder; and if Crown jumps to the A-B distributor -- well -- forget closing before December 31. (Plus Chesbay has signed a binding purchase agreement). So lots of questions remain.
MILLERCOORS GOES NUCLEAR
September 25, 2012
In an amended complaint on the Chesbay lawsuit, MillerCoors has gone rogue and has changed the cut of its jib, as it were, on its rights to choose acquiring distributors. Perhaps recognizing that its original complaint was particularly weak under Virginia franchise law, MillerCoors has amended their suit to widen the net with a more federal focus, and put forth the claim that their federal trademark registrations trump state franchise laws. If they are successful in their arguments, it could change the landscape in brewery approval cases.
Here is the gist of their argument, in four easy steps:
1. TRADEMARK OWNER. First, MillerCoors establishes that they own their brand trademarks and they are licensed to their distributors: "Chesbay's license to use the MillerCoors Trademark Assets in the Licensed Territory is contingent upon Chesbay's compliance with the standards of quality and uniformity that MillerCoors seeks to have associated with the MillerCoors Trademark Assets and the MillerCoors Brands," writes MC in their amended complaint.
2. FEDERAL TRADEMARK LAW. Second, MillerCoors brings up a federal law, the Lanham Act, which prohibits use of trademarks except by the registered owner and related companies where the owner still controls the trademarks. "In fact," says MillerCoors, the Lanham Act "imposes upon MillerCoors an affirmative duty" to control the trademarks.
3. CONTROL OF TRADEMARKS. So.... MillerCoors says that its distributor agreement is the instrument by which it controls its trademarks, and it "retains the contracutal right under its Distributor Agreement to control the quality and uniformity of" the trademarks, and can assign them to whomever they want. Presumably, allowing Reyes to have the trademarks is not an option they covet.
4. MC CAN DECIDE WHO LICENSES TRADEMARK. Therefore..... by signing the distributor agreement (which Chesbay did), Chesbay "acknowledge[d] that the trademarks, trade names, service marks, designs, brand names, labels, promotional slogans, and other trade designations MillerCoors uses in connection with all Products and other products sold or licensed to be sold by MillerCoors are and shall remain the sole and exclusive property of MillerCoors," says MillerCoors, quoting the distributor agreement.
This is a very different case indeed. It's a cut-and-dried federal trademark case, says MillerCoors.
REYES RESPONDS: "CHILLS DOWN YOUR SPINE"
To say that Reyes Holdings is not amused is an understatement. Here is Reyes' response in full:
"MillerCoors yesterday delivered the death knell to every state franchise law across the country. In the opinion of the foreign owned brewery, federal trademark law trumps state franchise laws. Period; end of story. All United States distributors take note: remember those franchise laws that MillerCoors represented you could rely on when you signed the MillerCoors distribution agreement, well apparently MillerCoors didn't really mean it.
"Based on MillerCoors' latest filings in federal court, the brewery believes that, not only can it direct distributors as to when, how, and to whom to sell their businesses, it can control every aspect of a distributor's business as it relates to their products and trademarks, regardless of state laws. The independence of the middle tier is non-existent in the mind of MillerCoors.
"We've listened to MillerCoors pay lip service over the years that it will follow state law if state law conflicts with its distribution contract. Statements to this effect have been made by MillerCoors to state regulators at the highest level, NBWA, state beer wholesaler associations, distributors, distributor attorneys and others.
"But when it's time for MillerCoors to put this into practice, it's a different story. Chesbay is simply following Virginia law and attempting to maximize the value of its business, which it has spent decades developing. After several MillerCoors anointed potential purchasers failed to offer a sufficient purchase price for its business, Chesbay negotiated and agreed on a deal to sell to Reyes Holdings. Apparently MillerCoors doesn't like that and wants to pretend that those state laws don't exist.
"If MillerCoors won't accept the fact that sections of its one-sided distribution agreement are unenforceable, and that state laws ultimately govern the relationship between suppliers and distributors, then it's time for a court to tell them so.
"We suggest that state ABC regulators and beer wholesaler associations, as well as others charged with upholding state laws and the 21st amendment, read MillerCoors' complaint. It should send chills down your spine."
MILLERCOORS RESPONDS TO CHESBAY SITUATION
September 26, 2012
MillerCoors last night responded to the reports of their amended lawsuit blocking the sale of Chesbay to Reyes. In their communique to distributors jointly from Tom Long and Ed McBrien, they make the argument that their amended complaint defending their trademarks is nothing new and is not an attack on franchise laws, and they suggest that it is the trade press which has stirred the pot.
I am reprinting it in its entirety:
"Based on the tone of recent trade media coverage, we wanted to quickly provide MillerCoors distributors with further context surrounding our decision to exercise our contractual right of first refusal relative to the proposed sale of Chesbay Distributing. Contrary to the picture being painted by advocates in the press, this is not an attack on state franchise laws. Rather, it is about protecting MillerCoors ability to match an offer from another purchaser and assign the right to purchase to its preferred buyer - in this case, a licensed wholesaler handling MillerCoors and other supplier brands in multiple territories. Importantly, this assignment keeps the seller whole, while at the same time protecting MillerCoors' brand trademark rights. This is nothing new. In fact, MillerCoors has long sought to protect its valuable brand equity through a balanced interpretation of state and federal law and our distributor contract. MillerCoors has gone to federal court to confirm that this right is consistent with Virginia law as well as MillerCoors ability to protect our brands. State franchise laws were developed to protect the value of distributors' existing businesses, especially when they choose to sell. They were not designed to guarantee the rights of buyers."
So MillerCoors is pointing out that while they are using federal trademark law to attempt to block the sale to Reyes, the end result doesn't change the value Chesbay gets for its business. This is true, as the MillerCoors/Honickman Group must match Reyes' offer. Although we note it puts Chesbay in a bind, as while they would theoretically get the same value for their business, they are still caught up in a legally binding purchase agreement with Reyes. Plus, there are the other suppliers that add complexity to the situation.
Regardless, distributors wrote and spoke to BBD in droves yesterday afternoon -- importantly before MillerCoors' memo was sent we should stress -- with nearly all distributors sympathetic to Chesbay and Reyes -- even A-B distributors. I would say that the prevailing sentiment isn't so much anger as it is disappointment. While I can't print all of your thoughts, I have picked a few that were representative of the whole.
Truth Squaders speaketh:
"NBWA is puzzled that MillerCoors is seeking to federally preempt state beer franchise law in its lawsuit against Chesbay Distributing. MC's desperate challenge contradicts its repeated public support for independent distributors, the three tier system and state alcohol regulation. Pursuit of this strategy is destructive to industry relations and, if successful, would be devastating to the independent beer distribution industry." -Craig Purser, National Beer Wholesalers Association
"There will surely be a response from MillerCoors clarifying their position, but I have to substantially agree with the Reyes statement for now. What value is the Distributor Agreement if this option is in place? Our state franchise law only requires that a Brewer sell us product, and that we purchase it to qualify the relationship between Brewer and Wholesaler. Might as well not sign the one-sided agreement if it doesn't mean anything. Reminds me of our current President who seems to find a way around the legislative process through Executive Order." -A. Distributor
"I am fairly young, (46), but I have already figured out in life, that a smile and a handshake promise are worthless when dealing with these big guys. Reyes is absolutely correct in their statements. However, MOST of these distributors let MC bully them into signing the agreement. So I guess if you sign it you deserve the repercussions. On the flip side, I do understand MC 'owning' their brands." -An A-B Distributor
"We are one of few that didn't sign the MillerCoors contract. Shame on the so-called distributor council for rubber stamping this thing!" -A. Distributor
"I think it's crazy what's MillerCoors is doing. Are they insane? Instead of selling beer, distributors will be obsessing about this for the rest of the year." -A. Distributor
"I bet AB is happy about this. Let MC do the heavy lifting. And AB isn't the bad guy for once." -A. Distributor
"It's desperation. They are losing share, and AB has the scale to pound them. So instead of blaming themselves, which would put them out of a job, they are turning on their distributors. Might as well blame the retailers too while you're at it but oh wait, they have negative leverage over retailers. So distributors it is! Therefore they believe that by totally having the ability to restructure their distributor network somehow that will translate into a turnaround. News flash: Fix your brands, fix your marketing, establish healthy margins on the back of AB's price increases, get your distributors back on your side, be the anti-AB (like I had thought you were doing) and sales will follow - and it won't matter a hill of beans who is selling your brands in Virginia or anywhere else. Yes, even private equity funds in the Pac Norwest with no experience in the beer business will be able to increase your sales. Just my fifty cents Harry, which will get you a Mr Pibb and a free donut at our local cstore." -A. Distributor
"Screw Reyes Wholesale. MC thinks they have gotten too big and are pulling out all the stops to stop them. I say GOOD!" -A. Distributor
"On the surface, this appears to be a last-ditch effort on MillerCoors' part.... Unfortunately for MillerCoors, there will be long-term unintended (or so I so righteously believe they are unintended) consequences within their distributor system. As proud as I felt when MillerCoors penned their 'Three Tier Doctrine', I feel doubly embarrassed by this desperate amended complaint in their lawsuit vs Chesbay. All trust and confidence in the MillerCoors leadership has vanished. How unfortunate that in their zeal to preclude the Reyes/Chesbay deal, MillerCoors alienated their entire network - both the buyers & the sellers." -A. Distributor
After reading MillerCoors' rebuttal, have your opinions changed? Should a brewer get to use whatever legal methods available to get to choose a buyer? It's a legitimate question. Has the trade press created a tempest in a teapot?
WHAT WE'RE HEARING. Let us put aside whether MillerCoors' legal argument that federal trademark law preempts state law or not. From what I understand from conversations and email exchanges I've had, here are the two irreconcilable issues that distributors are mostly talking about:
1. The Virginia franchise law clearly states that: "No brewery shall unreasonably withhold or delay consent to any transfer of the wholesaler's business, or transfer of the stock or other interest in the wholesalership, whenever the wholesaler to be substituted meets the material and reasonable qualifications and standards required of its wholesalers." The intent of that law is pretty darn clear. Reyes is clearly qualified to be a beer wholesaler for MillerCoors, since they are, after all, its largest.
2. Back in 2009 when MillerCoors was trying to get its distributors to sign its Distributor Agreement, they repeatedly assured distributors that they needn't worry about any measures in the contract which conflicted with state law, because when in doubt, state franchise law superseded the distributor agreement.
In fact, in the June 19, 2009 issue of Beer Business Daily, we reported that MillerCoors sales president Ed McBrien wrote to their California distributors (after a dispute with the CBBD over an AG letter) that: "We have said clearly and repeatedly that state law enjoys primacy over the terms of our agreement and that state law will prevail in the event of any conflict." Some distributors even added an addendum to their contracts before signing declaring this, although there's a question as to whether that would hold up in court.
BOTTOM LINE. Distributors see the inherent conflict between points 1 and 2 above in this amended Chesbay lawsuit, and that is the source of the head scratching and hand wringing. "We all signed the agreement believing that the brewery would keep their word that the fair dealing law was the gold standard," said one prominent distributor in an email last night. "I feel like a chump."
BEERNET EXTRA:
To read MillerCoors' amended complaint, click here: https://docs.google.com/open?id=0B_AxpKotj17vVjNRSGpNT1NGeTA
The June 16, 2009 story in BBD regarding the contract in California: http://beernet.com/publications_daily.php?id=1799
To read a story I wrote way back in 2003 about, interestingly enough, Chesbay and Reyes on warehouse efficiency, click here: http://www.beernet.com/publications_daily.php?id=2767
Until tomorrow, Harry
Comments
SEPTEMBER 26, 2012
Anonymous
MillerCoors has gone absolutely nuts, plain and simple.
Source: http://www.beernet.com/publications_daily.php?id=2768
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