A new legal perspective: a discussion of the brewer-wholesaler relationship with the partners at Ettelman & Hochheiser, P.C - Keith Hochheisner and Gary Ettelman - Interview

Modern Brewery Age, Sept 9, 2002 by Keith Hochheiser, Gary Ettelman

Keith and Gary, how did your firm become interested in working in the beer industry?

We have always handled the buying and selling of businesses, so we were involved with some Bud wholesalers early on. The bulk of our practice has always centered on multi-national manufacturers. From representing those types of companies, you get a broader picture of the laws that affect distributors, from an intellectual property perspective down to distribution laws. We've taken a holistic approach to things. If we are going to do something, we want to make sure it works not only with distribution laws but also with other pertinent commercial laws.

We really made a move into the beer industry when the Boenings were approached by Heineken USA to sell their business. Boening retained us.

GARY: We had done some work previously for some smaller distributors, and some larger ones, but the big push came with the Boenings.

KEITH: The beer industry is an anomaly for this law firm. In any given industry we usually represent the manufacturer, which in this case would be the brewer. This is the only industry where we are focused on the distributor.

We do a lot of work for manufacturers with operations in Europe and the Far East--semiconductor companies, for example. It's interesting how some of the laws and issues pertaining to these industries are pertinent to what goes on in the beer industry. Developing distribution rights, as an example. There are probably five bodies of law examining intellectual property rights. This really brings distribution rights to the forefront. Your rights aren't just what the contract says. I think our ability to see these issues comes from dealing with intellectual property issues from the manufacturer's perspective.

Is this what intrigued you about the beer wholesaling segment?

KEITH: Yes, I was very intrigued by it. A lot of it could be developed to take into consideration other bodies of law that other industries have taken advantage of.

GARY: Also, I think that representing manufacturers gives us some insight into what brewers are thinking. For example, when they do a consolidation, we understand what they are trying to accomplish. That helps us to sit down and work out problems through negotiation. Oftentimes, we can avoid the consolidation. We try to work with both sides, rather than come out with a shotgun and hammer people and run up litigation costs. We try to avoid bringing antitrust actions that will take years and years of litigation and millions of dollars in costs. We try to find a win-win solution.

KEITH: Fortunately, the majority of the transactions we've been involved with, even in the beer industry, have been negotiated resolutions as opposed to litigious wars.

GARY: Even the Heineken/Boening situation, within ten months we had a negotiated settlement. And a lot of people thought that would drag on and on.

You said you can bring new bodies of law to bear...What is your impression of the existing body of law pertaining to the brewer-wholesaler relationship?

KEITH: It's a patchwork from a national perspective. There are many things that are not taken into consideration, and it can be surprising. It goes from the simple to the complex. When a beer wholesaler acquires a brand from another wholesaler, it's an assignment of contract. But you would never want to do an assignment of contract, because under the law, Section 2-210 of the uniform commercial code, the buyer assumes the prior performance responsibility of the selling distributor. Who would want to do that? It's a simple structuring thing. You should terminate and enter into a new agreement and assign distribution rights. But you typically see an assignment of the contract, and legally, and unequivocally, the buyer is now responsible for all the performance deficiencies of the prior wholesaler from the day he got the grant. Some things that come to mind are bottle redemption issues, stale beer responsibilities, etc. So this practice is surprising.

When buying another distributor in an asset sale, people take the position that the buyer is not responsible for successor liability issues. That is changing, starting in California. The product line exception says that if the buyer is going to continue selling the same product, then the buyer still has the prior responsibility of the seller. That started in California ten or twelve years ago. It used to be that you were responsible as a successor only if you bought the stock, or if there was a merger, or there was some fraud involved in the transaction. Today, you could have arms-length transactions with different management, different owners and the buyer would still be responsible for the prior actions of a seller in an asset sale based on this product line exception, because the buyer is still selling the same product. The reasoning in California was that if the consumer of a product is harmed, they should have a remedy, and should be able to recover from the new owner. Because the seller usually goes out of business, takes the money and leaves, and there is no remedy. This started in California, and now New York state even follows it That happens very often. You get more liberal concepts of law, and they are a very minority view at first, but eventually they become the majority view.