Craft brewers allege illegal acts by beer distributors
By Michael Abramowitz
Monday, June 11, 2018
A Greensboro-based company told a North Carolina brewer he could get out of his distribution contract if he paid the distributor 16 times more than it cost him to get in, an affidavit in a lawsuit filed by a group of North Carolina brewers says, reported by the Carolina Journal.
Dustin Canestorp of Beer Army Combat Brewery in Jones County paid Freedom Beverage Co. $25,000 for the right to distribute Canestorp’s beer. Things were fine at first, but after a few months sales began to decline, the report said.
Canestorp, a Marine Corps veteran who set up his beer operation as a nonprofit benefiting charities, including those that help veterans, appealed to FBC, which maintained a “focus list” of brands it wanted sales reps to push, the affidavit said. “I was personally troubled by the notion of the ‘Focus List,’ because I didn’t understand how that could be fair to the brands that were not on the ‘Focus List.’”
Hoping to expand to neighboring states, Canestorp hired Global Beverage Group. His distribution and sales in North Carolina then fell even further, he said in the affidavit.
Tensions grew between Canestorp and FBC, to the point the brewer, based on positive conversations with FBC early on, asked to be released from the contract. That was possible, FBC said — as long as Beer Army paid FBC $400,000, according to reporting on the affidavit.
The affidavit is part of a lawsuit filed by the brewers against the state of North Carolina seeking to end enforcement of the state’s distribution cap and franchise laws on breweries.
The complaint — filed last year in Wake County Superior Court by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. — says the distribution cap and franchise laws injure and threaten to impose additional damage on the brewers. They can produce no more than 25,000 barrels of beer each year without contracting with a distributor.
Canestorp’s concerns aren’t related to the distribution cap but on what he considers the one-sided relationship between distributors and brewers, The Carolina Journal said.
Superior Court Judge Allen Baddour on May 15 allowed the case to proceed toward a trial. He denied a motion filed by the state saying the complaint should be dismissed with prejudice (barred from further action on the same claim).
Discovery will continue, subpoenas will be issued, and members of the N.C. Beer and Wine Wholesalers will be deposed.
“Our initial discovery has already uncovered illegal activity,” said Drew Erteschik, a lawyer for the plaintiffs. “Now that we have the right to conduct full discovery, we expect to uncover even more evidence of illegal activity. The court’s decision allows the case to move forward, closer to a trial, where we are confident we will prevail.”
The complaint tackles two state laws — the distribution cap, “which punishes craft breweries for their own success by forcing them to hand over the rights to distribute their own beer to private distributors if they sell more than 25,000 barrels” — and the franchise law. That law, says the complaint, “forces craft breweries to enter into oppressive, one-sided contracts with distributors that literally last forever, and which require the breweries to give those distributors control of their product — including decisions about pricing.”
Current craft beer industry efforts are aiming to lift the manufacturing limit, but have not gained much momentum. In 2017, N.C. House Bill 500, which would have raised the cap to 200,000 barrels, was gutted amid micro-brewer claims of backroom politics.
The Canestorp affidavit may offer some insight into Baddour’s thinking and the resultant decision.
After a close friend and Marine comrade was killed in action in Iraq, Canestorp returned to civilian life in Craven County, where he met with fellow Marines to play cards, talk about what happened and feelings of survivors’ guilt and struggling to overcome PTSD.
A home brewer, Canestorp often brought beer to the meetings, which morphed into gatherings of the “Beer Army.” That evolved into a nonprofit created to help veterans, which evolved into the brewery. The beer did well in Craven County, and Canestorp expanded to Wake, as well as Carteret, Pitt, and Onslow. It did well enough the company decided to hire a distributor, although it kept the right to self-distribute in Craven.
After 90 days, sales declined, the court document says. Canestorp asked why?
“We heard various excuses from FBC — for example, it was just the particular time of year, we needed to be packaged in bottles, etc. Notably, however, at this same time in Craven County, the one county in which Beer Army Combat Brewery continued to self-distribute, we were still extremely successful. It was a mystery to us that the one portion of our business that was self-distributing was so successful, while the remaining portions of our business that were using a third-party distributor were not.”
Beer Army hired Global, and, said the affidavit, “FBC’s distribution of Beer Army Combat Brewery’s beers in North Carolina fell even further. Apparently, there had been some ‘bad blood’ between the leadership at FBC and the leadership at Global. As FBC’s manager Greg Leone explained, FBC was not using its best efforts to distribute Beer Army Combat Brewery’s beers, as punishment for our decision to engage Global. In May 2014, Mr. Leone at FBC sent me an email saying that FBC’s President, Tim Booras, was ‘very angry’ about Beer Army’s engagement of Global and, as a result, had directed that Beer Army’s brands be removed from the Focus List.
“In June 2015, Mr. Booras sent me an email saying... he did not need Beer Army’s beer for their portfolio, stating, ‘We don’t need your [excrement]. … We really don’t need your beer,’” the affidavit continued.
Beer Army wanted to terminate the contract, but in North Carolina it’s not that easy, Carolina Journal said. As Canestorp explained, the contracted brewer must repurchase from the distributor self-distribution rights for, says Canestorp, “fair market value,” defined as “the highest dollar amount at which a seller would be willing to sell and a buyer willing to buy at the time the self-distribution rights revert back to the brewery.”
Erteschik and co-counsel Bob Orr argued in court the law amounts to economic protectionism and interferes with the plaintiffs’ constitutional right to earn a living, which the N.C. Supreme Court has called inalienable. The rules enrich one party in lieu of another, they say.
“These laws not only violate the N.C. Constitution, but they are also wrong for North Carolina as a matter of policy, Erteschik said. “If our General Assembly were to vote with its conscience and embrace its conservative free-market ideals, it would change these laws proactively, rather than wait for the courts to strike them down.”
It likely would be a long wait, according to Tim Kent, executive director of the N.C. Beer and Wine Wholesalers Association, who told The Daily reflector that the courts have correctly determined the wholesale distributors’ practices to be lawful and beneficial.
“We remain very confident that the state will successfully defend the state alcohol laws being challenged in this case,” Kent said. “Our courts in North Carolina and throughout the country have continually recognized that these laws have unquestionably been upheld as legitimate. The provisions being challenged in this case actually are exceptions to the regulatory system that was created specifically for craft breweries. Those exceptions are being challenged by only the two breweries located in Charlotte, and the N.C. Breweries Association is not named in the lawsuit.”
Kent said he was with the Craft Brewers guild last week, where two of its board members told him the guild does not want to challenge the self-distribution limits. He responded to the argument among many small craft brewers that challenging distributors, or even speaking openly against their influence, is too dangerous a line to cross.
“North Carolina unquestionably has the most favorable and most permissive laws for craft breweries of any state from Virginia to Texas,” Kent said. “It is a primary reason why this state has more than 250 breweries and continues to grow rapidly. Our favorable laws include the ability for craft breweries to distribute up to 25,000 barrels a year. It also provides them the opportunity to own and operate three retail operations in addition to the one at their brewery, privileges not afforded to craft brewers in other states. Our neighbors in South Carolina do not allow self-distribution of product.”
Kent said limits exist in North Carolina for effective tax collection and accountability of a regulated product.
“North Carolina has taken the position that alcohol, as a regulated product, needs an independent entity managing the distribution of products,” he said.
Did Booras as a stakeholder in the independent distribution industry, intended as a third-party overseer of alcohol regulation, take his authority beyond its intended purpose?
Indy brewer Canestorp met with Booras in a Jacksonville restaurant Sept. 18, 2014 and recorded the “roughly” 40-minute conversation, now part of the court record, according to the Carolina Journal report.
“I questioned him about whether Beer Army Combat Brewery’s decreasing distribution sales were the result of decreasing consumer demand, or whether, instead, the decreasing sales were actually the result of FBC punishing us for personal reasons. As the recording reflects, Booras freely admitted his action was punitive.
The affidavit also attributes the following statement to Booras: “This Franchise Law … a beer wholesaler wrote it, and it’s quite frankly biased.”
Canestorp turned in his brewers’ license April 30, 2015. He continues with his philanthropic work and has opened a craft-beer-themed burger restaurant in New Bern. He hopes to again open a brewery.
“If we do,” he says in the affidavit, “we will never use a distributor so long as the State of North Carolina enforces its misguided beer distribution laws.”
Cam Medina, a brewer at Greenville's Pitt Street Brewing Company, said his shop displays the seal of the Independent Craft Brewers Association, identifying it as small, traditional and independent, according to the association's definition of a true craft brewer.
Medina qualified his thoughts on the issue as his own and not necessarily representative of his brewery or any other, then got to the heart of the controversy.
“When you go into a shop in the market, up to 30 percent of those independent-appearing labels mislead consumers into thinking they are independently owned,” Medina said. “Without that seal, people might think their purchase of a particular craft beer is helping out the small, local independently-owned business. In reality, those companies have been bought by major distributors, and you're just redistributing that money to a larger corporation that ultimately doesn't want you to be in business, or if you are, they want the money.”
That is why the Craft brewers association seal is important, Medina said.
“The average person who cares about who makes their beer can pick up a beer without knowing the background of each brewery, look at the seal and recognize that the beer is from an independently owned brewery,” Medina said. “A lot of people say they decide to go with large distribution corporations because they can hold onto control of their individual brewery to some extent, collect a large sum from the company immediately and then offer the explanation that they wanted to extend their distribution reach. We won't be able to get our beer out to California without selling to one of these bigger breweries. You can't compete with them at such an expense.”
The law doesn't offer much help to those who wish to compete and stay small at the same time, Medina said. Craft brewers’ efforts to lift the 25,000-barrel limit for self-distribution to at least 200,000 barrels have not gained much momentum. In 2017, N.C. House Bill 500, which would have raised the cap to 200,000 barrels, was gutted amid micro-brewer claims of backroom politics.
Medina said that he and many other independent craft brewers take pride in going up against the global mega-production manufacturers and distributors.
“In eastern North Carolina, no matter how popular craft breweries seem to be, most people drink Bud, Miller or Coors,” he said. “When you're trying to bring a beer culture to places like Greenville, the big breweries that (undercut) the smaller ones are taking away the option for people to explore their local craft breweries. When that happens, they're screwing the little guy.”