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Industry Specific Relationship Statutes — Traps for the Unwary

Tue, 06/26/2018 - 11:30 -- admin25

by Deborah Coldwell, Jamee Cotton, and Sally Dahlstrom

If you represent clients seeking advice for a franchise or distribution company in Texas, read this article and take heed! As most lawyers know, some states have franchise relationship laws that are normally designed to protect franchisees from termination or nonrenewal without cause. While the Lone Star State does not have a generally applicable franchise relationship law, it does have many nuanced industry-specific relationship statutes regulating a wide assortment of businesses, from automobile dealers and manufacturers, to farm and industrial equipment manufacturers and wholesalers, to beer, wine and other alcoholic beverage manufacturers and distributors.

Motor Vehicles. The Texas motor vehicle dealer law addresses the manner of termination or nonrenewal, unfair practices, structure, transfer, and operations of a motor vehicle franchise. These laws apply to manufacturers, distributors, and dealers. The Texas Motor Vehicle Board has exclusive jurisdiction to ensure compliance with these laws, and Texas courts provide a great degree of deference to the Board’s decisions. See Tex. Occ. Code Ann. § 2301 et. seq. The statute also imposes a duty of good faith and fair dealing actionable in tort on each party to the franchise. Id. § 2301.478.

Farm and Industrial Equipment. Texas regulates farm and industrial equipment dealer relationships in similar ways. This statute provides for manufacturer repurchase of equipment upon termination, prohibits termination without cause, protects the rights of the dealer to transfer, and addresses various operational issues. Do not assume your client’s business is not subject to this statute merely because it does not deal in tractors. The range of products covered by this law varies widely and includes machinery, equipment, or attachments to machinery or equipment used for, or in connection with, landscaping, agricultural activities, construction, and mining, among many other activities. See Tex. Bus. & Com. Code § 57 et. seq.

Alcoholic Beverages, including Beer, Ale, and Malt Liquor. Perhaps one of the more interesting industries subject to relationship regulation in Texas is the alcoholic beverage industry. With the number of breweries and distilleries in Texas on the rise, the Beer Industry Fair Dealing Law (Beer Franchise Law) warrants special attention. The law regulates the relationship between a beer manufacturer (brewer) and a beer distributor and the rights of a distributor to purchase, resell, and distribute beer offered by the manufacturer. Tex. Alco. Bev. Code § 102.71, et seq. It also provides protections for a distributor related to termination, territory, dispute resolution, and inventory repurchasing requirements. It typically requires 90 days’ notice and good cause for termination, cancellation, or nonrenewal. The law also applies to agreements concerning the distribution and sale of ale and malt liquor. Id. § 102.81.

Texas courts are actively dealing with craft beer brewing disputes. Late last year in Texas Alcoholic Beverage Commission v. Live Oak Brewing Co., et al., 537 S.W.3d 647 (Tex. App.—Austin 2017, pet. filed), an appellate court ruled on the constitutionality of a provision in the statute that forbids self-distributing beer brewers from selling the distribution rights to their products. Tex. Alco. Bev. Code § 102.75(a)(7).

In 2014, three Texas-based craft breweries sued the Commission challenging the constitutionality of a provision stating that it is unlawful for a brewer to “accept payment in exchange for an agreement setting forth territorial rights.” The trial court granted summary judgment for the brewers, declaring the prohibition on a brewer’s sale of its distribution rights unconstitutional under the “due course of law” guarantees of the Texas Constitution. The Austin Court of Appeals reversed the decision, however, and upheld the constitutionality of the challenged provision. The brewers had argued that the statute denied them their fundamental economic liberty interest and that the statute was a naked transfer of wealth to beer distributors at the expense of brewers. The appeals court disagreed, noting that the same law including this prohibition also gave Texas brewers the right to distribute to retailers and to sell directly to consumers for on-site consumption. The court further noted that this type of compromise was the result of legislative horse trading among the various constituencies of the beer industry.

Texas continues to provide the protection of special relationship laws to certain industries. These statutes often regulate the nonrenewal and termination of agreements, may impose a duty of good faith and fair dealing on the parties, and frequently dictate notice and cure timelines. A wary practitioner should remain mindful of the complexities and nuances of the various Texas statutes regulating those industries.

Deborah Coldwell is a partner and Jamee Cotton and Sally Dahlstrom are associates at Haynes and Boone, LLP. They can be reached at deborah.coldwell@haynesboone.com, jamee.cotton@haynesboone.com, and sally.dahlstrom@haynesboone.com, respectively.

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