The 2019 legislative session in Annapolis is quickly coming to a close, but in contrast to the past couple of years, the Brewers Association of Maryland (BAM) has already racked up a significant win. Starting on January 1, 2020, Maryland breweries that produce under 20,000 barrels (BBL) annually will no longer be subject to the state’s franchise law.
Franchise Law in Maryland
Franchise law refers to a statutory provision that governs the relationship between brewers and beer wholesalers in most States, regardless of any private agreement that those parties may come to. Under the existing franchise law in Maryland, once a brewer enters into a distribution agreement, they can only exit that agreement with 180 days notice and a requirement to “show cause.” If at any point in that 180-day period, a wholesaler moves to address the complaints of the brewery, the 180-day clock automatically resets. That created a system where a brewery could either be perpetually locked into a distribution relationship that was harming their business, or otherwise be forced to pay tens of thousands, or sometimes even six-figure sums, to exit from the agreement. Additionally, it made many newer breweries especially wary of entering into distribution agreements in the first place. According to Brendan O’Leary, co-founder of Rockville’s True Respite Brewing Company and Treasurer of the Supporting MD Brewers PAC, the goal was to change this situation and achieve “a fair deal for everyone.”
Under the new legislation, breweries that produce under 20,000 BBL annually will no longer be subject to the standard franchise law provisions. Instead, a brewery would only need to provide a 45-day notice of termination to their wholesaler, there is no requirement to show cause, and the brewery would simply pay the distributor “fair market value” to reacquire the rights to sell their brand in the relevant geographic area. Fair market value would mean either (a) whatever the parties previously agreed to in their distribution agreement or (b) the value that is negotiated during the 45-day period. If the parties cannot come to an agreement during the 45-day period, there would be a binding arbitration to determine the amount that the brewery will pay. This process is considerably faster and more certain than the previous legal arrangement. While, O’Leary acknowledged that, “the third party arbitration clause is vague and a cause for future concern,” he explained that there was widespread buy-in among the brewers for this compromise.
“Even the larger Maryland brewers [who would have been included in the original 300,000 BBL limit franchise reform bill] felt we should act in a communal manner, and were not upset with the reform that was accomplished. They felt that they were happy with their existing wholesaler relationships and got to the size they are via those relationships.”
For their part, the Maryland Beer Wholesalers Association (MBWA) explains that, “Brewers, distributors and retailers have hammered out a solid compromise that lays the groundwork for years of growth in the beer industry in Maryland. We are pleased we were able to work together to pave the way for years of future success for the industry.”
Maryland Breweries develop new relationships
Given the rancor and hostility that accompanied previous efforts by the Brewers Association of Maryland (BAM) to push for reform, why was this year so different? I asked both Brendan O’Leary and Kevin Atticks, Executive Director of BAM, and they confirmed that there wasn’t any sudden change of heart among the beer wholesalers. Instead, the change seems to have come from the newer crop of elected state representatives and committee chairpersons who came into power in 2019. Senator Pinsky, the new chairman of the Senate Education, Health, and Environmental Affairs Committee (EHEA), explained that he is considerably more sympathetic towards Maryland brewers than the previous chairman.
“I wanted to make sure [franchise reform] happened. That the small brewers got a solution within the three-tier system. Some distributors are decent, and brewers will move away from those wholesalers that are bad. I want the craft beer industry to grow and help the three breweries in my district expand.”
When Senator Pinsky saw that wholesalers weren’t getting together with the brewers to reach a compromise, he stepped in to push the envelope. “I pushed a compromise through the Senate and that forced the House to act. I tried to come up with something that no one would be happy about.” While in the past the leadership of the House of Delegates and State Senate, Speaker Mike Busch and Senator Mike Miller, respectively, have been strong allies of the wholesalers and alcohol retailers associations and skeptical of reform efforts, Senator Pinsky explained that they did not push back on him too much this year. “They have seen that I’ve been trying to reach a fair solution and everyone can live with the compromise.”
Kevin Atticks believes that the wholesalers recognized “their political realities in Annapolis are about to change dramatically with the impending change in leadership in the Assembly.” Knowing that, and seeing that the Senate EHEA unanimously voted to approve a 30,000 BBL cap for franchise reform, the beer wholesalers stepped up to the table when the bill passed over to the House, and negotiated a deal alongside Delegate Davis, Chairman of the House Economic Matters Committee.
According to Atticks, “[there was] an acknowledgment that the rules needed to change because the realities of the market have changed. BAM is thrilled with the agreement and believes it is a long term solution.” Multiple sources claimed that “peace in the valley” was the goal of all parties moving forward. And while there are some outstanding ambiguities in the law, Kevin Atticks believes that they will be resolved successfully because the negotiations on the bill were conducted in good faith. “The law doesn’t take effect until January 1, 2020. In the interim, wholesalers who are in good relationships with their brewers will want to ink more specific terms in their agreements prior to the taking effect of the law.”