Until recently, few would have predicted that U.S. craft beers would find their way into European markets, yet today they are successfully meeting European tastes. Craft beers are increasingly able to compete with other products in Europe, such as wine, and there is increasing market demand in Europe for innovative, rare, and exotic beers.
U.S. brewers looking to sell their products in Europe cannot, however, simply apply their U.S. commercial strategies, but should instead adapt distribution models that align with their commercial goals in order to take into account the European legal and regulatory context. In addition, although the U.S. legislative framework has a lot in common with that of the European Economic Area, each EU member state has its own regulatory and distribution peculiarities.
EU competition law is a key area that U.S. brewers need to consider when entering into license and distribution agreements. U.S. antitrust law and EU competition law feature key differences in the assessment of distribution strategies, in particular when it comes to suppliers seeking to impose restrictions related to pricing, territories, customers, and channels. This is due to the single market goal of EU competition policy, which allows comparatively less flexibility for suppliers to impose restrictions on the resale of their products.
Arrangements aimed at restricting a buyer's ability to determine resale prices are considered serious, per se antitrust violations in the EU. In the U.S., on the other hand, resale price maintenance is assessed under the less-restrictive rule of reason standard that takes into account business and commercial considerations. Of course, some U.S. states further restrict such practices.
Under EU competition law, a supplier may prohibit a distributor from "actively" seeking sales outside its territory, such as by approaching individual customers inside the exclusive territory of another distributor (e.g. through direct mail, emails, or visits). But the supplier cannot limit the distributor's ability to respond to unsolicited orders ("passive" sales) requested by customers outside its territory.
Non-compete and single branding type arrangements have the effect of limiting the ability of a buyer to resell competing goods. Unlike in the U.S. where "tied house" and similar laws generally prohibit such arrangements, in the EU these may prevent pubs, cafés, and restaurants from selling beer produced by competing manufacturers. These restrictions are typically imposed on points of sale that have less interest in selling different beers originating from various producers (e.g., small cafés with a limited choice of beer). Smaller resellers, however, may not be the preferred target for incoming U.S. craft brewers, who likely would prefer establishments that offer greater choice. Similarly, single branding arrangements are not likely to be found in agreements with EU wholesalers and large retail chains, given that such outlets need to maintain a diversified product portfolio in order to attract customers.
If a distribution agreement does not contain any of the above restrictions, it normally will be exempt from the application of the EU competition rules on anti-competitive agreements and will not require further assessment, provided that the parties' shares in the respective markets do not exceed 30 percent. U.S. craft brewers entering European markets are unlikely to reach such high market shares, at least for many years. Customers of U.S. entrants, e.g. large retail chains and wholesale distributors serving mainly small retail outlets, cafés, restaurants, and other points of sale, are also unlikely to reach the 30-percent market share threshold because the beer market in Europe is quite competitive.
Finally, EU law makes an important distinction between agency agreements and distribution agreements. In a distribution agreement, ownership of the goods sold passes from the supplier to the distributor and both parties are independent players on the market. In the case of an agency, however, contracts for sale are concluded between the supplier (principal) and the customer. The role of the agent typically is limited to seeking out customers and negotiating contracts on behalf of the supplier—generally known as a "broker" arrangement in the U.S. As such, agents never assume the risk that a distributor has when reselling the purchased goods. This distinction is important because EU commercial agent regulations can provide large termination payments to agents (that don't apply to distributors), and EU competition law only applies to anticompetitive agreements concluded between at least two independent companies. Because an agent normally forms a single commercial unit with his or her principal, any restrictions imposed by the supplier on his agent are not scrutinized or limited by EU competition law.
In Italy, wholesalers have traditionally played an intermediary role with smaller shops, cafés, pubs, and restaurants, which has gradually led to a vertical integration with the main brewers operating in Italy. The current market outlook still includes a large number of independent local beer wholesalers, often grouped in consortia, which negotiate the terms of agreements with suppliers on behalf of their members.
Big retail chains (eventually arranged as buying groups) enjoy significant bargaining power that they use, for instance, to request that suppliers provide financial support for promotion, distribution, and other related activities performed by the distributors. (These payments are often requested and might be agreed upon outside of the main distribution agreement.) Retail chains that span several European countries may enter into separate framework agreements covering various countries in order to leverage their international presence to drive negotiations with suppliers.
Italy has, however, rules that provide a number of safeguards to protect smaller food and beverage producers. In particular, supply agreements with distributors must be in writing and contain a number of essential details (e.g., duration, price, delivery, and payment terms). There are also mandatory maximum payment terms that aim to prevent distributors from using their buying power to impose onerous terms (e.g., 60 calendar days from delivery in the case of alcohol beverages).
French law includes certain rules intended to prevent parties from abusing their bargaining powers. For example, mandatory maximum payment terms exist in order to prevent distributors from imposing unreasonably long payment terms. Unless the parties have negotiated otherwise, payment must be made within 30 days after delivery.
French law also prohibits any producer, trader, or manufacturer from obtaining from a trading partner:
- any advantage unrelated to a commercial service effectively rendered or which is clearly disproportionate to the value of the service rendered;
- any advantage, as a prerequisite to the placing of orders, without providing a written undertaking concerning a proportionate volume of purchases; or
- clearly abusive terms concerning prices, payment times, terms of sale, or services that do not come under the purchase or sale obligations, under the threat of an abrupt total or partial termination of business relations.
More generally, French law also prohibits subjecting a trading partner to obligations that create a significant imbalance in the rights and obligations of the parties, and abruptly terminating an established commercial relationship, even partially, without prior written notice.
Similar considerations are relevant when concluding agency agreements. French law protects commercial agents such that, if the principal wrongfully terminates the commercial agency agreement, the agent can receive an indemnity equal to up to two years of commissions. By contrast, under an abruptly terminated distribution agreement, the distributor is only entitled to actual damages.
Unlike most EU member states, Belgium has specific legislation regulating the termination of an exclusive distribution agreement by a manufacturer or supplier. These rules only apply to distribution agreements that (a) do not define the duration of the contract, (b) provide for exclusivity or impose substantial obligations on the distributor, and (c) are unilaterally terminated without any fault of the distributor.
In such cases, the distributor is entitled to a "reasonable" notice period, which, depending on the circumstances, may range from three to 42 months. If the supplier does not provide reasonable notice, the distributor may claim compensation, and additional compensation in case of termination.
With regards to distribution models, the French rules regarding commercial agency also apply under Belgian law.
Germany has more than 1,300 breweries and 5,000 different national beer brands—the highest numbers in Europe. But consumption of German-produced beer in the country fell to a 25-year low in 2015, to about 2.1 billion gallons down from roughly 2.9 billion in 1991. Nevertheless, demand for craft and specialty beer is rising. (See the sidebar for information on the role of the Reinheitsgebot in importing beer to Germany.)
Draught beer distribution in Germany is normally subject to long-term beverage supply agreements between brewers and innkeepers, with wholesalers/distributors occasionally acting as intermediaries. These beverage supply agreements qualify as framework agreements with continuing obligations and limited termination rights, and often impose exclusivity and minimum purchase obligations on the innkeepers. Contractual periods of up to 15 years have been considered valid by German courts. Since craft and specialty beer distribution is on the rise, however, the beer distribution practice in Germany is currently seeing more non-exclusive distribution agreements between brewers and distributors, some of them unwritten.
Unwritten distribution agreements or distribution agreements without express provisions on the right for (ordinary) termination are subject to ordinary termination after a "reasonable notice" period, but the length of this period depends on the individual circumstances of each case, in particular the duration of the agreement. There is also a risk that the brewer must pay compensation/indemnification to the distributor in case of termination without cause.
In 1905, there were 99,000 pubs in Britain. By 1969, there were 75,000. Now there are fewer than 50,000, with an average of 27 closing each week. But the beer market continues to diversify, with specialty and craft beers growing in popularity.
Under English law, agency exists where the agent receives authority from the supplier to introduce orders from customers and to create a legal relationship between the supplier and customer. An agent usually receives a commission, often on a percentage basis. The agent interacts with customers on behalf of the supplier, and so the agent usually has no legal obligation to the customer. Importantly, an agent benefits from the UK Commercial Agent Regulations.
A distributor, however, does not benefit from the UK Commercial Agent Regulations. As such, there is no requirement under English law to pay compensation to a distributor on termination of the distribution agreement. The rules, however, are complex and their application relies on the true substance of the arrangements—not just whether the parties label their arrangement as "agency" or "distributorship."
Advantages of distributorship include:
- the supplier will not generally be liable for the acts of the distributor, but will generally be liable for the acts of its agent;
- appointing a distributor will avoid the need for the supplier to have an established place of business in the UK, which will reduce the supplier's administrative costs, and may also be beneficial for tax reasons; and
- the supplier need not monitor accounts with customers, but only with the distributor (although the credit risk is entirely with the distributor and not spread among customers).
UK competition rules may have an impact on the appointment of a distributor, whereas they usually will not apply to a genuine agency arrangement. Even if EU competition law applies (see above), UK competition law and regulation may also apply. The UK Competition Act prohibits agreements that may affect trade or competition within the UK. Such agreements are rendered void and associated parties may be subject to substantial fines.
Craft brewers should be delighted that Europeans—long considered the best brewers of beer—now thirst for U.S.-brewed beer. In filling this demand, however, craft brewers must pay careful attention to legal arrangements to maximize their potential and minimize pitfalls.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.