In the last couple of weeks, I have had a number of conversations with friends in the industry about dissolving relationships with distributors in franchise states. As I have written about before, franchise laws can be extremely tricky. I have gone through a few instances of making changes in those states so here are a few quick tips I have to offer:
1. Although there are laws in many franchise states that allow wineries some recourse, and those laws may seem cut and dried to you, the state heavily favors the side of the distributor and nearly all lawsuits show this as precedence. Do you see provisions that state that if a distributor is a late or slow/no pay, they don’t adequately market wine, or they don’t buy wine at all, then that qualifies as “just cause” for a release? Sorry. It’s hard to win on this one.
2. If you can prove you have “just cause,” and your existing distributor agrees to a release, it’s common practice in many franchise states that in order to obtain a letter of release, you must buy out your franchise agreement. This means that the winery pays its old, under-performing distributor a year+ of gross or net profits. Even if the distributor still owes thousands of dollars!
3. How about waiting periods? In many franchise states, once a release letter is obtained, they still have 30, 60, 90+ days to sell their remaining product and the newly appointed distributor must sit on their hands and wait to sell your wines until that waiting period is up. Of course, the old distributor will offer a fire sale, which means that for months afterward, who will want to purchase them at regular wholesale prices? This can cause slow shipments, depletions and months of pain for a winery that has finally obtained a release, not to mention a frustrated and dejected newly appointed distributor sales force.
4. Have you considered lawsuits? Many distributors (particularly the big ones) in franchise states retain franchise attorneys to specifically go after wineries that have dropped them. Although you may eventually win the suit and be granted a release, consider that you may end up spending tens of thousands of dollars, and while the suit drags on, you will have months without your product being sold in that particular market. Also consider that your emails are NOT your personal property, so during a lawsuit, anything you have ever written to anyone in that franchise state becomes public record if it is included in the suit.
My biggest piece of advice: leaving distributors in franchise states is rarely easy and commonly very expensive. Do not consult other distributors in a franchise state for recommendations on what to do. Call up a qualified franchise attorney, spend the $2-5k it will likely cost to evaluate your position and possibly obtain a release letter, and do things the RIGHT WAY.