Government Affairs Extra
Exporting
Craft Beer to Europe
BY
MARC SORINI, MÉLANIE BRUNEAU,
STUART MATHEWS, VERONICA
PINOTTI, AND STEFFEN WOITZ
U
ntil 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.
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European Union
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
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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.
Italy
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).
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.
Belgium
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
France
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.
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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
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.
United Kingdom
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
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CRAFT BEER AND
THE REINHEITSGEBOT
Since 1516, German brewers have
produced beer according to the
Reinheitsgebot, the beer purity law that is
one of the oldest (and still valid) consumer protection laws in the world. Pursuant
to the original Reinheitsgebot, the only
ingredients that could be used in the production of beer were water, barley, and
hops. In 1987, the Court of Justice of the
EU found that, with regard to imported
beer, the Reinheitsgebot was protectionist and therefore constituted a violation of
EU laws on the free movement of goods.
Accordingly, U.S. brewers can label their
products as “beer” (or “bier”) on the
German market regardless of the ingredients used.
Since the 1987 EU ruling concerned only
imported beer, Germany chose to continue
to apply the purity law to beer brewed in
Germany. Currently, an amended version of
the Reinheitsgebot applies, stipulating that
only water, malted barley, hops, and yeast
be used for any bottom-fermented beer
brewed in Germany. Because of strong
German consumer preferences, labeling
beer as complying with the Reinheitsgebot
is still viewed as a valuable marketing tool.
Brewers, however, should make sure that
Reinheitsgebot-related marketing claims
are not misleading.
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.
Marc E. Sorini is a partner in the Washington
D.C. office of McDermott Will & Emery LLP.
He heads the firm’s Alcohol Regulatory &
Distribution Group. Mélanie Bruneau is a
partner in the Brussels office of McDermott
Will & Emery LLP. Stuart Mathews is a partner
in the London office of McDermott Will &
Emery LLP. Veronica Pinotti is a partner in
the Milan office of McDermott Will & Emery
LLP. Steffen Woitz is a partner in the Munich
office of McDermott Will & Emery LLP.
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