Free Craft Beer! – New York Times

CRAFT breweries may be a big story in the media these days, but they face much tougher challenges that most other small businesses.

Take the rules governing how beer is distributed, known as franchise laws, which were written decades ago and today are being used to limit consumer choice by keeping small and start-up breweries from moving easily into new markets.

Almost every state franchise law demands that breweries sign a strict contract with a single distributor in a state — the so-called three-tiered system. The contracts not only prevent other companies from distributing a company’s beers, but also give the distributor virtual carte blanche to decide how the beer is sold and placed in stores and bars — in essence, the distributor owns the brand inside that state.

This model was enacted in the 1970s, when the industry was a lot different: Back then there were fewer than 50 brewing companies in America and 5,000 distributors. Many small distributors carried beer only from one large brewer, and they needed protection in case the brewer they represented wanted to pull its product.

But today, while Big Beer remains big business, there are more than 2,700 breweries, and fewer than 1,000 viable distributors, so that relatively few distributors control huge sections of national territory, and each one can take on dozens of large and small breweries’ brands.

Nevertheless, state laws continue to empower distributors to select brands and manage them however they want — selling those they choose to sell, while letting other brands sit in their warehouses. The only recourse is to sue, and many small breweries lack even a fraction of the resources needed to take on a big distributor in court. As a result, they’re stuck with the bad distributor, which severely hampers their ability to perform and grow as a business.

Buy a small brewer a beer, and pretty soon he or she will be regaling you with war stories about fights with distributors.

For example, I once tried to terminate a contract with an underperforming distributor in New York for not only selling my products outside of his territory, but selling out-of-date beer. I thought it would be straightforward, since my contract said I could leave “with or without cause.”

But the distributor took us to court, saying the state’s franchise law, which sets a high standard for showing cause, trumped whatever my contract said. Two State Supreme Court rulings upheld my position, but, fearing a further appeal, I settled out of court. I was freed from the contract, but the legal fees and settlement cost Brooklyn Brewery more than $300,000.

Stories like this abound: My fellow craft brewers at Dogfish Head, in Delaware, faced a half-decade-long, six-figure legal dispute with a distributor just to terminate their contract.

Even worse, some small brewers refuse to enter certain markets because of the local distributors’ reputation. That’s bad for these businesses, and bad for the economy, but particularly bad for consumers, who would love to try the latest popular craft beers but can’t find them in their state.

Some states have remedied the distribution inequities. In 2012 Gov. Andrew M. Cuomo of New York and the State Legislature created a “carve out” from the state’s beer franchise law for the smallest brewers: If your brewery represents less than 3 percent of a distributor’s business, and you produce fewer than 300,000 barrels of beer a year (which covers all but the largest craft breweries), you can switch distributors by paying for the “fair market value” of the distribution rights, as negotiated by the brewer and distributor — still an expensive proposition, but easier than going to court.

North Carolina has a similar law, while in Washington State, small brewers are excluded from the state’s franchise laws completely. Just last week Michigan enacted a law allowing very small brewers to self-distribute. And several other states, including Massachusetts and Pennsylvania, are considering revising their beer laws to allow small brewers to do the same.

As the craft-beer sector expands, states are waking up to the economic benefits it offers — in jobs, tourism and taxes. Many states now offer subsidies and regulatory assistance for new breweries. But too few states have taken on the tougher job of pushing against distributors and their lobbyists.

For small brewers, the flexibility to change distributors or distribute their own products is essential to gain access to markets, increase consumer choice, grow and pour money back into the economy. The success or failure of a beer should depend on whether consumers like it — not on whether archaic distribution laws prevent them from finding it in the first place.

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