Calif. AG warns MillerCoors on wholesaler agreement.

The California Attorney General's office wrote a letter to MillerCoors associate general counsel Kelly Grebe last week, informing the company that certain provisions in the MillerCoors wholesaler contract are contrary to California's alcoholic beverage control licensing laws, and should be considered unenforceable.

Back in November 2008, the California ABC had notified MillerCoors that it had concerns regarding the level of control over beer distributors that the agreement gave to the brewer. MillerCoors Counsel Grebe met with the California Attorney General's office in April, and sent a written proposal to address the AG's concerns in May. But the AG's letter of last week notes that the Attorney General considers three problems unresolved, as follows:

1. Paragraph four, which covers MillerCoors' control over the distributor's business plan.

2. Paragraph Seven, which relates to MillerCoors' control over the hiring and firing of the distributor's management employees.

3. Paragraph Eight, which includes MillerCoors assertion of the right to approve changes in the distributor's ownership.

According to the AG's office, while MillerCoors' May letter addressed these issues, it did not resolve them. For example, in its May letter, MillerCoors referenced paragraph four, and conceded that a business plan could be jointly determined by brewer and wholesaler. However, the AG said MillerCoors has not yet amended paragraph four.

The AG's office noted this discrepancy in their letter. "This office is disappointed that MillerCoors has declined to provide a written amendment to paragraph 4 of the Agreement," California AG Edmund Brown wrote. "MillerCoors has insisted on an agreement that is uniform nationwide, and although MillerCoors apparently believes that this is administratively convenient for its own business interests, that position is inconsistent with the disparate alcoholic beverage laws in the 50 states and is contrary to the sovereignty granted to states in this area under the Twenty-first Amendment ... We expect MillerCoors to act in good faith, but its refusal to provide technical amendments to bring the Agreement into conformity with California law raises our level of concern regarding the Agreement."

The AG noted that in regard to MillerCoors' approval rights regarding the selection and retention of the distributor's senior management (paragraph seven) MC has agreed to limit MillerCoors' rights regarding senior management to the position of "operating manager" of MillerCoors' brands; and agreed to base its rights on standards of commercial reasonableness.

"MillerCoors does not, however, go far enough," the AG wrote. "MillerCoors' ultimate right to approve the selection and retention of the distributor's management employees gives MillerCoors control of the day-to-day operations of the distributor. This conclusion is bolstered by the Distributor Standards, which MillerCoors sent out after our meeting in April, that define the term operating manager broadly and that display a far reaching intent by MillerCoors to exercise day-to-day Operation of the distributor's business at MillerCoors' discretion. I also note that paragraph 7 implicates other provisions of California law unrelated to alcoholic beverage controls, including the Fair Employment and Housing Act and various provisions of the Labor Code, in that MillerCoors may be making itself an employer of such employees."

Regarding MillerCoors' rights regarding changes in ownership of the distributor as set forth in paragraph 8 of the Agreement, the AG said MillerCoors has declined to make any meaningful change to the Agreement.

The AG noted that MillerCoors could drag out the distributorship sales process--by imposing itself between the distributor and any-third party purchaser, by reviewing a potential sale prior to the distributor having discussions with any third-party, and by possessing the option to negotiate for purchasing the business itself. MillerCoors' has also claimed right of first refusal and the right to refuse assignment of its distribution rights to any purchaser of the distributor.

The AG said that "if MillerCoors were to exercise these provisions, MillerCoors would have such far-reaching leverage over the distributor that MillerCoors would effectively control that distributor's business."

The California AG said that MillerCoors is taking too much upon itself. "MillerCoors is not licensed as a distributor, and MillerCoors is not permitted to exercise virtually unfettered control over who can own a distribution business and how that business is run day-to-day," the AG wrote. "The State of California regulates these distributors as licensees, and for MillerCoors to control such licensees, who in fact distribute non-MillerCoors products that are in direct competition with MillerCoors' own products, violates California's alcoholic beverage control laws and the spirit of openness that the People of California require of this closely regulated industry."

The AG's office said it agrees with the California ABC that paragraphs 7 and 8 of the wholesaler agreement give MillerCoors "a contractual right to exercise the privileges of a distribution licensee without actually being so licensed" and the AG has deemed those provisions to be unenforceable under California law.

"Similarly, we would also deem paragraph 4 to be unenforceable should it be exercised as written in the Agreement," the AG's letter added.

"Given that these provisions are unenforceable," the AG's letter concluded, "a distributor will not be in violation of section 23300 merely by entering into the Agreement. If MillerCoors were to enforce paragraphs 7 or 8 of the Agreement, as it maintains it has a right to do, or paragraph 4 in a manner other than as stated in your May 8th letter, we will review that action and take whatever steps are appropriate under California law. Such review would include, but not be limited to, unlawful business practices ... and California laws relating to anti-trust and franchising. This office has a particular concern that the coercive effect of this Agreement, which gives MillerCoors a high level of control over the distributors' businesses and operations, could ultimately result in a detrimental impact upon competition in this industry, particularly as to small and craft breweries, and we intend to monitor that issue closely."

The California Beer and Beverage Distributors applauded the AG's action.

"The California Attorney General's decision ... upholds transparency and accountability in our state's alcohol licensing laws," said CBBD President Victoria Horton. "This decision prevents contractual control of any tier of the industry by another tier of the industry. The decision is rooted in the fundamentals of the 21st Amendment which led to the adoption of the three-tier system and is embedded in California's alcohol beverage laws."

Horton added, "CBBD intends to encourage our members to fully comply with the Attorney General's ruling. It is our hope that MillerCoors will also respect the Attorney General's decision and revise its Distributor Agreement to conform to California law and to immediately cease and desist from seeking to have its Agreement executed in its current form by any California distributor."

Ms. Horton noted that the California Attorney General and Department of Alcoholic Beverage Control is now aligned with state regulators and law enforcement officials in Nevada, Michigan, and Virginia who have reached similar conclusions.