States have been vested with the responsibility to regulate the manufacture, distribution, and sale of alcoholic beverages since the repeal of Prohibition. In carrying out this authority, many states have implemented a three tier distribution system for the sale of beer: breweries produce the beer and sell it to distributors, distributors then sell the beer to retailers, and retailers sell the beer to consumers.

The specific body of laws that govern the rights and responsibilities between the brewery and the distributor are often referred to as franchise laws. Should a brewery enter into an agreement with a distributor, franchise laws govern that relationship and oftentimes trump contractual terms that may be contrary to statutes.

Franchise laws were originally enacted when the beer industry looked much different than it does today. In the 1960s and 1970s, less than 50 breweries existed in the United States, but there were close to 5,000 distributors. At that time, a distributors business was almost entirely reliant upon a single brewery, thus necessitating protection from the brewery pulling its product or terminating the agreement and forcing the distributor out of business.

One such protection found in almost every body of franchise law is the disallowance of the brewery from terminating an agreement with a distributor unless there is a showing of “good cause,” an often insurmountable burden. Another such protection is the disallowance of a brewery from entering into more than one distribution relationship in a particular territory. Franchise laws force breweries into single-distributor relationships and make it very difficult, and at times almost impossible, for the brewery to get out of those relationships.

Fast forward to today, when there are more than 3,000 production breweries in the United States, another 2,000 in planning, and less than 1,000 distributors. Unlike 30 or 40 years ago when there was a real risk of a distributors business being completely destroyed by one large brewing company, distributors today do not need the protections from the smaller breweries that may make up only a relatively minor portion of a distributors diverse sales portfolio.

Application of some the more archaic franchise laws are no longer necessary to protect distributors from the unequal bargaining power of the larger breweries. In reality, dated franchise laws actually create artificial inequality between the brewery and the distributor and, at times, inhibit a brewery from entering or expanding in a particular market.

Since a brewery must sell its products through a three tier distribution system, the distributor is expected to make significant investments of time and money developing the brands of a brewery. If the brewery is in its infancy with little to no market validation, a significant investment of time and money may not be practical or feasible for the distributor. The result is two parties bound by a heavily one-sided contract and market realities that dis-incentivize the needed investment of time and money by the party with the greater bargaining position.

Ultimately, the distributor decides where the beer of a particular brewery is sold and in what manner. Given that a distributor may have a large number of brands in their portfolio and retailers have limited space, the distributor chooses which brands to market and to what degree.

In order to combat these realities, some states have provided limited exceptions to the three tier system and limited exceptions to franchise laws. These exceptions normally come in the form of self distribution rights, the ability of the brewery to purchase distribution rights back from a distributor, or providing greater ease in the ability of a brewery to change distributors.

There is tremendous value in an independent distribution tier and the three tier system in general. In the long term, an independent distribution system is the most efficient means to get alcohol products to market. It is also critically important to maintaining the integrity of the post-Prohibition three tier system.

However, there are very real situations for smaller breweries in earlier stages of a brewery life cycle where limited self distribution up to a per barrel a year cap and greater ease in changing distributors would only benefit both sides of this relationship. The brewery can let the market decide the viability of the product and the distributor can focus its resources on the development of proven brands.