This piece was written for Great Lakes Brewing News in November 1996.

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Brewing Politics in New York: The Franchise Bill of 1996

The growth of microbreweries and brewpubs in New York State made the organization of a craft brewers’ association an eventuality, but the small brewers got a rude shove in 1996 with the unexpected passage of a new State law, which began life as Senate Bill 5410-B/Assembly Bill 6458-C, also known as The Franchise Bill.This amendment to the Alcoholic Beverage Law is described as a bill to protect wholesalers from the removal of their major brands without notice or recompense. But many maintain that the bill contains clauses that effectively exempt the major national brewers and give them competitive advantages that threaten the existence of New York’s local and regional brewers.

Craft brewer Benjamin Feder, president of Westchester Brewing Company in White Plains, cites the new law as “an unvarnished effort by large brewers and wholesalers to squeeze out of the market small local and regional brewers.”

Regional brewer F.X. Matt II, of F.X. Matt Brewing in Utica, New York, notes, “We have mixed emotions about the bill, because the distributors are our friends, and they want a contract for good reasons. Our concerns focus on the 30-day notice and 90 days to remedy.”

Matt refers to the part of the law that requires brewers and wholesalers to sign contracts that remain in effect even if the distributor is making little or no effort to sell the brewer’s products. If and when a brewer discovers this, the distributor has 30 days to think about the brewer’s protest and 90 more days in which to remedy the situation. Only after that 120 days can a brewer take legal action to sever the relationship and begin anew with a more willing distributor. “That 120 days is an eternity in the beer business,” Matt notes, four months in which most small brewers, absent from the retail shelves, would go out of business.

Why would a distributor sit on a small brewery’s product? That’s the second cause for concern: The new law allows major national brewers to loan money to New York state distributors, to become limited partners, even to approve and disapprove management choices within a wholesaler’s organization. In Ben Feder’s words, “The Bill puts a small brewer completely at the mercy of a wholesaler, while at the same time it allows large brewers an unprecedented level of influence and control over those same wholesalers.”

Add to this the fact that August Busch, of Anheuser-Busch, has stated publicly that he wants a “100% share of mind” from his distributors, and that Anheuser-Busch has an incentive program for those who distribute their brands exclusively, and you can see how the pressure on distributors to drop smaller brands is growing.

If there is any sunlight in this for the smaller brewers, it is that New York Governor George Pataki has recognized the small brewers’ concerns as “serious and real.” In his Memorandum approving the bill, he noted, “Brewers in our State fear that large brewers may be tempted to provide loans to beer wholesalers contingent on the elimination of smaller brands.”

Gov. Pataki recommends that the State Liquor Authority monitor the implementation of the legislation and that the legislature re-visit the law during its next session to put in statutory measures to protect “the continuing vitality and competitive posture” of the State’s smaller brewers.

If the law is so objectionable to so many, and even the Governor had doubts, how did it get passed? A look at the bill’s history — taken from the New York State legislature’s records — sheds some light on the process.

In 1995, SB5410-B was proposed, amended and died quietly. In 1996, it wasn’t even on the legislative agenda, but rather was lying in state with a committee that didn’t even meet. In the background, however, the authors of the bill were working with the New York State Beer Wholesalers Association, who in turn were consulting with Anheuser-Busch, and the bill was being fine-tuned to their wishes. On June 7th, it was formally amended, still without appearing on the legislative agenda. Then, on the morning of June 14th, during the last week of the legislative session, the Senate’s Rules Committee “discharged the bill,” i.e., took it from the committee where it had lain dormant, and placed it on their agenda. The Rules Committee’s agenda automatically becomes the Senate’s Supplemental Calendar, and thus the bill was sent to the floor to be voted on that afternoon.

It is important to note that in the New York State Senate, it is assumed that if a bill emerges from committee, it meets with the approval of the leadership, and thus is to be approved. Any Senator who votes against a bill has some explaining to do, and thus Senators are loath to disagree, especially without a thorough knowledge of the bill. And in this case, it was apparently determined that the Senators would have no such knowledge.

The rules state that a bill is subject to a First Reading, a Second Reading and Third Reading, so that everyone who votes will be acquainted with what they’re voting on. However, the aptly named Rules Committee has the ability to change the rules, and they did so in this case, going straight to the Third Reading and a vote.

As is routine during the final week of legislation, votes were being taken by a “fast roll call,” so that as many as a hundred bills might be voted on in one afternoon. Under these rules, all Senators who are absent are recorded as voting “Yes.” As a result, every Senator who was on the phone, meeting with a constituent or in the bathroom, voted “Yes” on a bill they had yet to read or even hear of. And so SB 5410-B went from dormant to a done deal in less than a day.

It was passed on to the Assembly that same day, which took the bill into committee on June 17th, and ordered it directly to a Third Reading on June 25th, voted and passed it as well. All this before many brewers were even aware of the bill’s existence.

In short, the Franchise Bill was expertly shepherded through the legislature in a manner that insured success and evaded inspection at every turn. So why would the leadership and a handful of sponsors move a bill through in such a manner?

In July, Daniel Dorsey, Chairman of the New York State Beer Wholesalers Association, spelled it out — perhaps with more pride than discretion — in his What’s On Tap newsletter. “Passage of the franchise bill,” he wrote, “is directly related to the emphasis the Association has placed on Albany in the past several years, and our success in the State Capitol is the result of two major factors. One is the excellent work of Mike Vacek, our president and legislative representative. The second big factor is the existence of our PAC and the skillful way we have used your contributions to it.”

Lest anyone think the contributions are in canned goods or winter clothing, Dorsey continues, “If the franchise bill is not a good enough reason for those of you who have not yet contributed to the PAC to sit down and write out a check, then think about this: It’s getting harder and harder for me to figure out new ways to tell you in this column just how important the PAC is to the continued success of our business.” In addition, the New York State Beer Wholesalers Association’s PAC is not alone in its contributions; state politicians have also benefited from the support of Anheuser-Busch, all a matter of public record.

By September, a few small brewers had been alerted and began writing and calling their legislators, but the bill had already been passed. The Governor took those objections under advisement, but still signed the bill on September 25th and it went into law immediately.

In the weeks following, craft brewers in New York awoke to the potential impact and began organizing. Representatives from eight New York microbreweries and brewpubs met in Syracuse on October 29th, and laid the foundation for the New York State Craft Brewers Association.

The new president, Tim Herzog, noted that the first task of the new association will be “to make sure we never get caught behind the eight-ball again.” This will require a greater political awareness on the part of the small brewers, and a united voice in Albany. The small brewers are already suggesting amendments to the Franchise Bill, which could be voted on in 1997, to make the bill more acceptable.

Ben Feder notes that one solution is to exempt small brewers from the requirements of the bill, because their economic impact on wholesalers is minimal, and they represent no threat to the wholesaler’s business if their product is withdrawn.

At the very least, small brewers are calling for a reduction in the 120-day clause. Without the capital resources of a major national brewer, a craft brewer could quickly be put out of business by a non-performing distributor.

An escape clause could immediately free all other brewers from their contracts with a wholesaler who has been closed in a consolidation move by a major brewer. Without this clause, a smaller brewer could be dragged along to a surviving wholesaler, even if this new distributor is far from the craft brewer’s main markets and has no interest in selling their beers.

An escape clause could be added for small brewers whose distributors have entered into partnership agreements with large national breweries. Taking that a step farther, if the three-tier system and wholesalers’ independence are to be maintained, the clauses regarding limited ownership of wholesalers by breweries should be revisited in their entirety. F.X. Matt notes, “If a bank owns 35% of your distributorship and a brewery owns 40%, you cannot help but be in bondage to them.”

Given their size, the small brewers can never hope to match the demonstrated strengths of the major brewers in the political arena. Major brewers have employees dedicated to political concerns; they employ lobbyists who work directly with public officials; they can easily raise funds for PACs and election campaigns. But with a healthy trade association, the craft brewers can hope to be heard, by legislators and beer drinkers alike.

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In response to questions raised by this article, Anheuser-Busch prepared the following statement, included here in full:

Statement by Stephen K. Lambright
Vice President and Group Executive
Anheuser-Busch Companies, Inc.

SB 5410B is an effort to establish fair dealings between brewers and wholesalers, and should be good news for consumers because it will help guarantee the best possible local distribution system for the hundreds of brands of beers available to beer lovers. At Anheuser-Busch, we are firmly committed to a locally owned independent network of distributors, because our distribution system is our ace in the hole in getting all our beer brands to consumers as fresh as possible.

The law was a compromise worked out over two years with input from beer wholesalers and large and small brewers. Anheuser-Busch reviewed and commented on various drafts of the bill furnished by the New York State Beer Wholesalers Association.

The law as finally passed closely mirrors the legal principles underlying our existing contracts with our wholesalers. The law also establishes the terms and conditions under which agreements with wholesalers can be ended.

We have long had the ability to own wholesalerships under New York law, but have only one. This new law makes it possible for us to make loans to qualified individuals without great wealth who can then become independent beer wholesalers. In no way does it require any wholesalers to sell their businesses to anyone. Thirty other states have similar provisions.

The new law should not put any brewers at a disadvantage, but just to make sure of that Gov. Pataki has instituted a monitoring system that we support.

As for “share of mind,” there is no question that we prefer our wholesalers to be devoted solely to the distribution of our beers — just as it would make little sense for a Coke bottler to be selling Pepsi, or for a Ford dealer to be selling Chevrolets. We’ve placed all our eggs in one basket with the wholesalers, and it only seems fair that they would do the same. Similarly, it makes good business sense to provide incentives to those wholesalers who are dedicated to selling our beers, but there are not different pricing levels for wholesalers based on whether they sell our brands exclusively.

Finally, on the issue of political contributions, we participate in the political process on behalf of our employees, shareholders and consumers by making appropriate political donations that are completely within the spirit and the letter of the law. Our contributions to PACs and candidates are a matter of public record.