Nevada is one of the largest, most dynamic and fastest growing markets for alcoholic beverages in the United States. In this state known for its opulent casino hotels, four star restaurants and A-list night clubs, fine wine, beer and spirits play a major, and growing, role in crafting the hedonic experience that continues to draw millions of visitors every year. In the rush to get into this hot market, many distributors and suppliers, particularly newer, smaller ones, aren’t investing the time necessary to familiarize themselves with the franchise laws that govern their relationships in this state. As discussed below:
• Franchise relationships between suppliers and distributors can be both contractual and statutory (i.e., imposed by law);
• Suppliers who wish to use more than one distributor in a particular market area must do so by agreement; and
• Suppliers who sell quantities above a statutory level are subject to stringent requirements to show “good cause” before they can terminate a distributor.
Nevada is a franchise state within the three-tier alcoholic beverages distribution system. That means that alcoholic beverages suppliers who want to sell their products in the state must establish either exclusive or non-exclusive franchise relationships with in-state distributors. The franchise relationships are created by written or oral contracts and can cover the wide range of issues that can crop up between a supplier and a distributor.
If a supplier intends to use more than one distributor in any particular marketing area, however, (i.e., a non-exclusive franchise) that needs to be specifically spelled out and agreed to between the two parties. Otherwise, the franchise that is established will default to being exclusive for the marketing area, which is determined by the distributor’s coverage area to which the supplier has agreed. Where there is more than one franchise with Nevada distributors for specific brands, the supplier cannot discriminate between the distributors as far as the terms and conditions of the franchises.
Once a franchise is established between a supplier and a distributor, the supplier must provide its in-state distributor with at least 90 days written notice before terminating or discontinuing the franchise or causing the distributor to resign. The notice must be sent by certified mail, return receipt requested, and must include:
(a) the reason for the proposed action and a description of any failure of the distributor to comply with the franchise agreement, and
(b) a statement that the distributor has 60 days to correct any such failure.
In addition to the requirements that a distributor must be provided with notice and an opportunity to fix the problem, under Nevada law, when a supplier’s annual sales in Nevada reach 2,500 barrels of malt beverages, or 250 cases of spirits, or 2,000 cases of wine, the franchise between that supplier and its in-state distributor becomes subject to additional overriding provisions. These provisions, which are implied by law, trump any contrary contractual provisions and restrict the supplier’s ability to terminate the franchise.
Under these circumstances, a supplier cannot terminate, or refuse to continue, the franchise or cause the distributor to resign unless the supplier has first established that good cause exists for those actions.
What is “good cause?” It is defined by law as the distributor’s failure to substantially comply with the supplier’s essential and reasonable requirements, so long as those requirements are not discriminatory when compared with other similarly situated wholesalers. “Good cause” is also defined as bad faith on the part of the distributor in carrying out the terms of the franchise. Needless to say, this is a high bar.
Although the Nevada requirements to terminate a franchise are indeed normally stringent, there are a number of scenarios under which a termination can be effective immediately upon the distributor’s receipt of a notice of termination. Among those include: if the distributor has filed for bankruptcy protection; if the distributor made a material misrepresentation to the supplier; if the distributor failed to pay for product within 7 business days after receipt of notice from the supplier demanding immediate payment; or if the distributor discontinued selling the supplier’s products.
Today, Nevada’s alcoholic beverages industry is expanding and growing as new mega-casinos are springing up and as the hottest celebrity chefs vie to have a presence on the infamous Las Vegas Strip. To capitalize on this exciting market, many large distributors have entered the state in the recent past and established a base here. There are also many new, smaller distributors starting up in Nevada to service the countless niches that must be filled in a town where the consumer demands the widest array of choices available.
Suppliers are flocking here too, wanting to get their wines or microbrews or specialty liquors onto menus and wine lists that entice adult drinkers 24/7, 365 days a year. In this vibrant marketplace, understanding the basic tenets of Nevada’s franchise law can go a long way towards increasing the likelihood that suppliers and distributors will be able to develop successful and long-lived businesses.
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