It may surprise many of my readers that I recently authored an amicus brief, which advocated for the expansion of a state’s franchise rules. It seems at odds with my free-market principles that abhor economic protectionism.

Liquor franchise rules guarantee that a supplier/manufacturer cannot get out of a distribution agreement with a liquor distributor without a just cause. These franchise agreements lock a manufacturer into an iron clad agreement with distributors, which takes an act of God to get out of, and even poor performing distributors are often times paid handsomely to terminate the distribution agreement.

I think franchise agreements are bad for the industry and should be a thing of the past! So, then it begs the question, why did I author an amicus brief supporting the expansion of franchise laws?

Why, because life is a balance and sometimes you need to choose the best path. In this situation, I desired to attack a law that I believe discriminates in favor of in-state interests at the expense of out-of-state interests.

In S&H Independent Premium Brands East, LLC v. Alcoholic Beverages Control Commission, the Massachusetts Supreme Judicial Court will consider whether failure to apply franchise protections, which are afforded to an in-state entity, to an out-of-state similarly situated entity violated the Commerce Clause. The statute in question, Massachusetts Gen. Laws ch. 138, §25E, applies franchise protections to “any licensed wholesaler”. The issue is whether “any licensed wholesaler” applies to just Massachusetts wholesalers or those licensed anywhere. And if it is limited to Massachusetts wholesalers, does this violate the Commerce Clause?

This case deals with two companies that play the same exact role in the liquor system, they act as importers and help distribute a foreign manufacturer’s products in the U.S.

One distributor/importer is based in Massachusetts, the other is based in Colorado.

The Massachusetts entity is permitted to obtain a wholesaler’s license, which affords it franchise protections under Massachusetts law. Under the law, a supplier looking to terminate an agreement with a wholesaler must do so according to specific legal requirements.

For the out-of-state entity, it is not permitted to obtain a wholesaler license, nor is it entitled to the benefits of franchise protections.

What this case comes down to

In this case, the Massachusetts and Colorado entities are similarly situated, both work to open state liquor markets for foreign brands. Neither of these entities store product in Massachusetts and neither of these entities sell to retailers. They perform the same exact business function.[1] The difference is Massachusetts law allows its in-state entity protections under the law that it does not afford to out-of-state similarly situated entities.

In essence, Massachusetts law allows its in-state entities a greater economic advantage over its out-of-state counterparts. Knowing that an out-of-state wholesaler does not maintain the same economic protections leaves them vulnerable and in an inferior negotiating position. The favorability towards in-state interests at the expense of out-of-state interests violates the Commerce Clause.

The issue becomes whether the state can justify discriminating in a way which results in an economic advantage for its in-state businesses?

The state and its allies take the position that to earn the legal benefits of a wholesaler, the wholesaler must be physically located in Massachusetts. Their position relies on their reading of the U.S Supreme Court cases in North Dakota, Granholm and Tennessee Wine that an in-state wholesaler presence requirement permits discriminatory and differential treatment.

I argue that an in-state physical presence has not been endorsed by the U.S Supreme Court and Tennessee Wine is clear in its mandate that discrimination against all out-of-state interests is not permitted and that in Granholm a state can’t mandate a physical presence as a condition for doing business.

Why this case is important

With the National Beer Wholesalers Association (NBWA) also filing an amicus brief, this case’s outcome is important for the industry.

If the Court holds that the state’s law discriminates against out-of-state interests, then the Court could rule that an out-of-state wholesaler can obtain benefits under Massachusetts law without maintaining a physical presence in the state.

Alternatively, the Court could make a ruling that the state’s law is discriminatory against a similarly situated party and slice it down the middle. Since the Massachusetts business did not hold inventory nor sell to retailers and only sold onto other wholesalers, they performed the same business as an out-of-state entity performed, and there was no reason why physical presence would be necessary and hence could not justify discrimination.  

Or of course, they could keep the status quo and allow the higher courts to make these tough decisions.

Either way, this is an under the radar case which could have big implications!


[1] I am basing this off the lack of evidence from the record confirming these items and the lack of evidence in the record proving otherwise.