Monday, November 5, 2007

Unwritten distributor law

Back in 2006. Michael-David Winery informed Frank-Lin Distiller, their instate distributor, that their open-ended agreement was being terminated upon reasonable notice. After withholding payments in excess of $350,000 for wine purchased, Frank-Lin sued Michael-David Winery for $8.9 million in damages from the termination. The distributor claimed it is standard practice that an oral distribution agreement with goals could be terminated only for cause, and then only after written warnings and an opportunity to cure were given. After a 5 week trial and less than 2 hours of deliberation, a Stockton California jury not only confirmed that vintners have the right to terminate open-ended agreements with wine distributors at any time upon reasonable notice and for any reason, that the wineries not have to share in the value of the growth of the brand they helped to build.

In an industry where small wineries and distributors in California generally operate under open-ended oral agreements, this ruling is important because it blocks the so called franchise law which would grant distributors excessive control of a brand regardless of channel performance. “Without this decision, California vintners would have found themselves at the mercy of distributors who would, in effect, become entitled to a significant portion of the winery’s brand value and the winery owner’s equity simply because the distributor had delivered the product,” said John Hinman of Hinman & Carmichael LLP, Counsel for Michael-David Winery. “This case was a backdoor attempt to create a wine “franchise” law in California—a legal system in place in 14 states that makes it nearly impossible for wineries in those states ever to change distributors and often forces wineries to buy their own brands back from underperforming distributors.”

Hopefully this will be a signal to those 14 states that currently have such a law in place to rethink ownership of brand. Without companies like Michael-David Winery and their Seven Deadly Zins, distributors like Frank-Lin would have no product to distribute.

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