Day 1: Major Brands v Diageo/Glazer's Trial

FILED SEPTEMBER 18, 2014

Three tier disputes and especially franchise relationships have been contentious issues in all sectors of the alcohol beverage industry of late. But never more than in Missouri over the past few years - at least for wine and spirits.

As we reported Monday [see WSD 09-15-14 for updated coverage], the final hearing in the ongoing Major Brands v. Diageo and Glazer's Distributors of Missouri began this week with opening arguments yesterday (Wednesday, Sept 17). Your editor is on the scene scoping highlights for our readers back home.

THE BIG PICTURE: What makes this particular trial so important is that it will determine a number of key franchise issues, specifically whether Diageo and Major Brands (MB) had a "community of interest" - a phrase used many times by the lawyers for all three companies. Ultimately, depending on Judge Dierker's findings -- who was also the judge in the prior MB/Diageo trial -- Diageo may owe damages. But recall, Diageo was indemnified by Glazer's, meaning Glazer's will have to pay up if the case is decided in Major Brands' favor. This could set precedents for further franchise disagreements in Missouri -- you'll recall, there are a number of them -- and even have implications throughout the country.

DISSECTING THE CLAIMS: The claims that will be considered in this trial are as follows:

Issue 1: Did Major Brands have a franchise relationship with Diageo?

To have a franchise relationship with Diageo, Major Brands must prove that it had (A) a license to use Diageo's trademarks and (B) shared a community of interest with Diageo.

Issue 2: If Major Brands did have a franchise relationship with Diageo, did Diageo have cause to terminate?

If Major Brands did not have a franchise relationship with Diageo, cause is not required for termination.

Issue 3: If Major Brands did have a franchise relationship with Diageo and Diageo did not have cause to terminate, what damages should be awarded to Major Brands?

If Majors Brands had a franchise, but Diageo had cause to terminate, there are no damages. Similarly, if Major Brands did not have a franchise, there are no damages.

Issue 4: Did Glazer's tortiously interfere with Major Brands' franchise/contract with Diageo?

Issue 5: Did Major Brands breach its contract with Diageo?

DAY 1: LET THE PLAYERS PLAY

Let us outline the legal actors in yesterday's opening remarks:

Richard Walsh: council for Major Brands
Lazar Raynal: council for Diageo
Nick Lamb: council for Glazer's

HE SAID, SHE SAID: MB, Diageo and Glazer's all presented opening remarks to the jury, which amounted to a specific timeline with three different viewpoints.

Major Brand's council Richard Walsh was the first out of the gate summing up the case as "two parties taking advantage of another" to get more money. "They know it's wrongful," but the amount of money is their motivation, throwing aside 80 years of business history. Well, yeah, was basically the response from Diageo's lawyer Lazar Raynal. Diageo's reason for termination was "about performance...about the failure to perform...it's a business decision." We'll get into the nitty gritty below.

FRANCHISE OR NOT? MB contends that they exhibited a community of interest with Diageo through their role as a distributor in the three-tier system. That includes POS displays, tastings, truck ads, and other marketing initiatives in Missouri on behalf of Diageo. And that's where MB's franchise argument comes into play. Missouri's three-tier system doesn't allow suppliers to deal directly with retailers, so wholesalers take on that role. "That's the community.... they [MB] were very successful, very profitable," said Richard.

But Diageo's lawyer Lazar Raynal argued: "We had no franchise with MB.... There is no franchise in Missouri." They contend the 2011 Missouri Beverage v. Shelton case changed things, as the 8th Circuit court ultimately ruled that Missouri's alcohol franchise agreement falls under the general franchise rules [see WSD 04-23-2013].

MB claimed relationships, goals and sales were going well in 2011 and 2012, so they were blindsided by Diageo's termination letter in March 2013. However, Diageo said they gave MB ample warnings that they were unhappy with the relationship, but they said MB spent their resources on alternative strategies rather than improving their Diageo business. "Did they have a plan to fix things? No, they had a plan to sell," stated Lazar.

PERFORMANCE ISSUES: He then illustrated that MB missed case and points goals in 2008, 2009, 2010, and referred to 2011 as a "disaster." MB missed its volumes goal in 2011 by 50,000 cases. He also claimed that MB president Barry O'Neill communicated that their "disappointment [was] shared." The result, said Lazar, "is we ultimately had to lower goals for them," but they still missed the case goal. And when they hit the points goal in 2012, it was just "barely" over.

2012 was the same year Major Brands chief Todd Epsten passed away from brain cancer. Prior to his passing, he and his wife Sue McCollum, current chairman and chief of MB, met with a number of Diageo executives who gave them assurances that they were okay with Sue transitioning into leadership, claimed MB's lawyer.

However, Lazar pointed out that from 2007-2012 MB won "zero" Golden Bar awards for their "performance." Nominated, sure, but local Diageo reps do the nominations and stand to win a bonus if the distributor wins, he said. And while MB did indeed win for social responsibility in 2012, he alluded that Diageo saw the award as an opportunity to present Todd's family with a eulogy after his passing, noting they've done something similar for another distributor partner. In other words, Diageo was "doing the right thing.... and we are proud to have given it to them."

DIAGEO'S CONSOLIDATION PLANS. Not long after these events, Jeff Ivey, Diageo's svp of route to market and chief commercial officer, flew to Missouri to meet with MB's leadership team, alerting them that Diageo planned to consolidate its distribution in Missouri. Jeff presented MB with an option to sell their Diageo brands to a competitor, form a joint venture or further invest in their operations. MB council Richard Walsh said they got the impression that the third option was not actually feasible, so they began looking to sell or form a partnership.

To put things in perspective, MB held about 80% of Diageo's business in the state at that time, while Glazer's picked up the rest, which included the Tanqueray, Ciroc, Johnnie Walker and Ketel One brands. And before Diageo left MB, they held 55% share of the Missouri market while Glazer's held 45%. "They shifted.... One family went from number one to number two," and vice versa, said Lazar, who attempted to mitigate some of the claims by MB.

MAJOR BRANDS DEBATES A SALE OR BRAND SWAP: One point Diageo and Glazer's council brought up yesterday is that MB was intent on selling their business after Diageo gave them an ultimatum or, at the very least, interested in swapping brands with a competitor. Diageo and Glazer's said MB was considering options to either sell to Southern Wine & Spirits, Glazer's, Wirtz or Charmer. "None of their plans were keeping Diageo." However, Lazar gave the impression that Sue was not being forthright with Diageo, Glazer's and even fellow MB execs about her intentions by meeting with investment bankers BDT Capital, who they paid $250,000 every three months. Warren Buffett allegedly uses the same company. He explained to jurors that this particular company is known for being "secretive."

Another kicker for Diageo was when they came to the conclusion that MB was using its spirits business, largely made up of Diageo brands, as a "bank" to fund their new acquisition Major Eagle, an Anheuser-Busch distributor in Miami. "That's not a shared interest for us," said Lazar. Though MB said the two companies are completely separate interests.

Furthermore, Diageo and Glazer's contend that Sue reached out to Shelly Stein of Glazer's and intimated that they were in talks to sell to Southern Wine & Spirits when there was the residency court case that could have ultimately brought Southern into Missouri, but it eventually failed. This apparently concerned Shelly as a former investment banker and as the head of a company that recently "had a specific bad experience with Southern in Indiana" that caused Glazer's sales to "plummet." Recall, Southern was successful in overturning residency laws in Indiana that allowed them to set up shop and take valuable brands, including Diageo.

This, said Lazar, showed MB was "willing to play hardball," adding that ultimately, it was their decision to pursue selling the business and franchise legislation that pushed Diageo to Glazer's. MB "didn't want to negotiate, wanted to legislate...[they] wanted driver's seat," said Nick. He also noted that MB won Pernod Ricard USA and Constellation Brands' business in Missouri: "which they say is fair. But if we get Diageo we end up in court."

GLAZER'S TORTIOUS INTERFERENCE: Now, recall that Glazer's is also fighting MB's claim of tortious interference. Glazer's stood by the claim that they saw an opportunity and went after it. Their lawyer Nick Lamb pointed out that it would have been easier for Diageo to move its four brands from Glazer's to MB, rather than the other way around. In fact, he said it was Jeff Ivey's preference to stick with MB, but they assert MB was unwilling to negotiate. "We are the quarterback that got picked...it's that simple." The fact is, said Glazer's, "Diageo was not happy" with MB.

In the past, Diageo admitted Glazer's wasn't up to the task, but during the time MB was deciding how to proceed with its business in light of Diageo's consolidation plans, Diageo said it noticed an improvement in Glazer's overall business. With current chief Shelly Stein at the helm, who Diageo said was instrumental in professionalizing the business, "We now had a choice... someone willing to try harder," and lacking the "my birthright to have your business" mentality, said Lazar.

Richard quoted Shelly, who reportedly said, "our appetite for expansion" doesn't cut back "for a franchise state." At the same time, MB claimed Glazer's started "raiding our employees."

MB also said Diageo shared confidential information with Glazer's about MB's business without their knowledge. MB pointed to a particular meeting where Jeff went to Dallas to meet with company executives, but "strangely" there were no notes or slide decks from the meetings during this time. Though Lazar told jurors Jeff goes to Dallas all the time because Glazer's is a major wholesaler for Diageo in the US.

THE DEAL: On March 5, 2013, Glazer's and Diageo signed a distribution contract, which ultimately transfers $100 million of revenue from MB to Glazer's. It's a three-year contract with a two-year term to expand. Altogether, a 5-year "package of all our desires," said Richard. The stipulations include:

$20 million upfront payment from Glazer's to Diageo
$5 million per year in addition
Glazer's will designate 85 dedicated employees to Diageo
Unlimited indemnity
In all, it amounts to $85 million

Essentially, Richard claimed "Glazer's caused Diageo to terminate" its agreement with MB and they "were damaged by it." This, they said, is cause for their tortious interference claim. Furthermore, Diageo violated Missouri's Franchise Act and community of interest as it failed to prove "good cause" for termination, MB reiterated.

Glazer's and Diageo were also quick to point out that MB has offered similar deals to other supplier partners since losing Diageo, including an $11 million upfront payment to Constellation Brands, calling it a double standard.

POTENTIAL DAMAGES OWED: It's clear there is lots of money at stake. And that brings us to MB's request for monetary damages. Richard indicates that later in the hearings they will present witnesses who estimate Diageo - and therefore Glazer's - is on the hook for an estimated $160- $197 million. Glazer's council Nick Lamb rebutted that estimate, claiming that it is based on predictions that are not "fair or reasonable," mainly because you can't predict what brands will sell well in the future, using Sazerac's Fireball as an example.

He also mentioned that Glazer's contract with Diageo is three to five years, and when that ends, there's some competition waiting on the other side. Recall, MB purchased Missouri Beverage (MoBev) and received an investment from the Wirtz Family. Recall, Wirtz Beverage distributes Diageo brands in Illinois. Glazer's said it expects that they will make a play for Diageo's business as soon as the opportunity arises.

It's a dog-eat-dog world. "Suppliers hold the cards," said Nick.

"Community of interest?" said Lazar. "We're suffering while our competitors are growing.... We want someone working hard for us."

OLE SMOKY EXTENDS PARTNERSHIP WITH SOUTHERN

Ole Smoky Tennessee Moonshine is extending its alignment with Southern Wine & Spirits another 11 states. Southern already represents Ole Smoky in a few states in the Midwest and the Northeast, but picked it up AZ, AK, CA, CO, HI, MD, MN, NY, SC, WA and D.C. in this agreement. The distributor now represents 50% of Ole Smoky's US accounts.

"What it really does, aside from keeping us high on the radar screen at the corporate level in Florida, is it makes us that much more important to the entire team at Southern which is always a big deal," Ole Smoky chief John Cochran tells WSD.

He noted their reason for leaving their former distribution houses were that they were "either one of too many moonshine brands and felt like second or third fiddle on any given day," or they "weren't a priority because the houses had other things that were higher priorities for them"

FUTURE OPPORTUNITIES: Ole Smoky is now in 49 states, but John says they still have an unsatisfactory market penetration, except for in the brand's home market of Tennessee. "The brand and the category have a long way to go in terms of it's just general availability to the consumer."

The brand has zeroed in on the on-premise opportunity to rectify this problem. This summer, the brand teamed with the Outback Steakhouse chain to run a limited time offer promotion and in November, 1,000 Buffalo Wild Wings locations will launch a cocktail that uses our Ole Smoky apple pie. Ole Smoky will go after several more concepts and if the Outback promotion is any indication of what's to come, the chain sold over three quarters (750,000) of a million cocktails during the summer program. "We see a lot of interests, again, in the category and the brand. That's been very energizing," says John.

Ole Smoky boasts 13 products in the portfolio and come mid-October, they'll be launching a product called Shinenog, which is "basically cookies and cream moonshine." Ole Smoky will make 5,000 cases of the 35 proof product, 4,000 of which will go into the wholesale channel.

WSD BRIEFS:

KIEU HOANG WINERY ACQUIRES GUILLIAMS VINEYARDS. Guilliams Vineyards were established in Saint Helena in 1890. The property comprises ten acres, seven of which are vineyards, as well as a testing room, crush and bottling facility. The purchase will help Kieu Hoang Winery, who just purchase the former Michael Mondavi property in Carneros, with its goal of making the best cabernet sauvignon in the world. John Guilliams, the former proprietor of the Vineyards, has agreed to stay on the property as an in-residence consultant and winemaker to assist the Kieu Hoang Winery as the company continues to implement its plan to elevate the inventory and the quality of its fine wine, particularly with the Cabernet Sauvignon blend and merlot selection.

BOMBAY SAPPHIRE READIES FOR DISTILLERY GRAND OPENING. Bacardi's Bombay Sapphire gin will host a grand opening for its distillery on October 1. The newly restored site serves as a distillery, visitor experience center and brand home.

TRUETT-HURST AND TOTAL WINE EXTEND PARTNERSHIP. Beginning fall 2014 and spring 2015, Total Wine & More will be adding several new Truett-Hurst SKUs to its listing. These addition include Mad Duck Sauvignon Blanc, Inconspicuous Old Vine Lodi Zinfandel, Eden's Eve by Eden Ridge and The One Arm Man, a reserve level of Truett-Hurst's The Fugitive. Each new listing will retail for between $11 and $35 per bottle. Total Wine already boats 21 wines from T-H in 16 states.

CATOCTIN CREEK RELEASING NEW RYE. Virginia's Catoctin Creek distillery has revealed its newest expression: Roundstone Rye Cask Proof. At about 120 proof, the liquid was aged first in Minnesota white oak and finished in a Bordeaux red wine barrel. Only 283 bottles were products and will be available in the New York, Maryland, D.C. and Massachusetts market on November 1.

Until tomorrow,
Emily

"One man cannot hold another man down in the ditch without remaining down in the ditch with him."
- Booker T. Washington

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