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R & R Marketing, L.L.C. v. Brown-Forman Corp.

April 22, 1999

R & R MARKETING, L.L.C.; ROYAL DISTRIBUTORS AND IMPORTERS, LTD., INC., AND REITMAN INDUSTRIES, INC., PETITIONERS-RESPONDENTS,
v.
BROWN-FORMAN CORPORATION, RESPONDENT-APPELLANT.



The opinion of the court was delivered by: O'hern, J.

Argued February 1, 1999

On certification to the Superior Court, Appellate Division, whose opinion is reported at 307 N.J. Super. 474 (1998).

The opinion of the Court was delivered by

This appeal concerns the right of two wholesale distributors of alcoholic beverages to assign their existing franchise rights to distribute certain brands of alcoholic beverages to a wholly-owned limited liability company (LLC). The founding members of the LLC sought as well to retain the franchise rights to themselves. The Director of the Division of Alcoholic Beverage Control (Director and ABC) ruled that the restructuring was an attempt by the two wholesalers to force their suppliers to distribute through an unauthorized wholesaler, thereby causing the two wholesalers to lose their franchise rights protected by the anti-discrimination law. The anti-discrimination law provides:

There shall be no discrimination in the sale of any nationally advertised brand of alcoholic beverage other than malt alcoholic beverage, by importers, blenders, distillers, rectifiers and wineries, to duly licensed wholesalers of alcoholic beverages who are authorized by such importers, blenders, distillers, rectifiers and wineries to sell such nationally advertised brand in New Jersey.

[N.J.S.A. 33:1-93.6]

On appeal, the Appellate Division found that the transaction was in substance, if not form, a merger that should not cause the two wholesalers to lose their franchise rights. 301 N.J. Super. 474 (App. Div. 1998). Because one of the founding members of the LLC has since acquired the other, we remand the matter to the Director to reconsider the status of the parties and to adopt rules or other suitable guidelines for future restructurings in the alcoholic beverage industry.

I.

This is our understanding of the facts. Reitman Industries, Inc. (Reitman) and Royal Distributors and Importers, Ltd., Inc. (Royal) sought to combine their business operations. Each had been authorized to distribute certain products sold by respondent Brown-Forman. Reitman's operations were centered in North Jersey, while Royal's operations were in South Jersey. Both companies distribute alcoholic beverages for various suppliers, including Brown-Forman. Reitman was authorized by Brown-Forman to distribute fourteen specific brands, while Royal was authorized to distribute five brands. *fn1

Under the anti-discrimination law, once a supplier authorizes sales of a nationally advertised brand by a wholesaler, the wholesaler is entitled to continue to distribute the product absent exceptional circumstances. These authorizations are granted on a product-by-product basis and are then reflected on a brand registration schedule that each supplier must file with the ABC for each product. Suppliers sometimes authorize a single wholesaler to handle a product, creating an exclusive distributorship within the State. In other instances, suppliers grant multiple authorizations to competing wholesalers.

We are informed that the majority of the two wholesalers' relationships with suppliers, including Brown-Forman, are not protected by written contracts. The parties therefore attempted to determine which structure for their business combination would afford them the best chance of preserving their protections under the anti-discrimination law. Due to potential tax consequences the parties rejected a corporate merger and decided to establish a new entity, a limited liability company, a form of business organization recently authorized by the New Jersey State Legislature.

Under the agreement, Reitman and Royal would each transfer their operating assets to the new entity, R & R Marketing, L.L.C. (R & R), and in return obtain an ownership interest in R & R. The founding corporations were to maintain a separate existence, while agreeing to refrain from competition with R & R. Reitman and Royal first sought to transfer their supplier authorizations to the new entity with the consent of the supplier, if necessary. In the alternative, Reitman and Royal agreed that they would purchase the alcoholic beverages required by R & R, and transfer those beverages to R & R at cost. After the business combination commenced operations on July 1, 1994, Brown-Forman refused to honor orders placed by the companies.

The companies sought protection from the Director pursuant to N.J.S.A. 33:1-93.6, and requested interim relief compelling sales by Brown-Forman pending his deposition. Interim relief was granted as to Royal and Reitman, but not as to R & R. After reviewing the submissions, the Director found that the statute affords no protection to a New Jersey wholesaler until a manufacturer has designated it as an authorized distributor. The Director reasoned that the objectives of the law do not include forcing a distiller to distribute its products to unauthorized wholesalers. Although he recognized that the anti-discrimination law is to be liberally construed, the Director characterized the plan to transfer products to R & R at cost a "sham agreement." He concluded that "[o]nce Reitman and Royal executed agreements obligating them to front for R & R, they forfeited their protection under the statute." On the question of whether the formation of the LLC was a de facto merger, the Director reasoned that the distinguishing characteristic of a merger is that the acquired entity ceases to exist. That did not occur here.

On appeal, the Appellate Division ruled "that the Director elevated form over substance." 307 N.J. Super. at 486. The court observed that "[t]he crux of the Director's decision seems predicated on the fact that although both Royal and Reitman are separately authorized wholesalers, their newly-formed limited liability corporation is technically not an authorized wholesaler." Id. at 484. The court reasoned that "where the new entity is composed of previously approved wholesalers, the supplier's control of its distribution ...


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