Alaskan Brewing Cancels Washington Distributorship, Loses Big in Arbitration

Alaskan Brewing was recently left out in the cold by a Washington Appellate Court

Alaskan Brewing Co. is the subject of an interesting Washington Court of Appeals opinion, which was handed down today. The opinion is unpublished and provides little to nothing in the way of new legal precedent, but it provides an intriguing look at the Washington distributorship law.

Alaska Distributors Company (ADCO) was the exclusive distributor of Alaskan Brewing Company (Alaskan) products in seven Washington counties. In August 2008, after ADCO notified Alaskan of its intent to sell its distribution rights to another distributor, Alaskan terminated ADCO’s distribution services. The termination of the contract was for convenience, rather than for cause.

After termination, ADCO filed for arbitration, in accordance with their distribution contract. The arbitrator awarded damages of $5,537,520 to ADCO for the fair market value of the terminated distribution rights, along with attorneys fees and legal costs. Alaskan filed a motion to vacate in King County Superior Court that was denied, while the Court confirmed the arbitration award as a judgment. Alaskan then appealed the dismissal of its motion to vacate.

Alaskan argued that the arbitrator made mistakes of law that warranted a look by the courts. The brewer believes that the arbitrator (1) failed to apply a contractual liquidated damages clause, (2) failed to apply an agreed upon contractual definition of “fair market value” (for purposes of damages for termination) and (3) erred in applying a statute that awarded the winner with its attorneys fees.

The major argument is over the application of former RCW 19.126.040(2) and (3) (this statute has been amended), which provided:

“[a] supplier shall give the wholesale distributor at least sixty days prior written notice of the supplier’s intent to cancel or otherwise terminate the agreement [unless termination is for cause]” and must provide the reasons for the termination. The “wholesale distributor shall have sixty days in which to rectify any claimed deficiency.”

Former RCW 19.126.040(2).

“The wholesale distributor is entitled to compensation for the laid-in cost of inventory and liquidated damages measured on the fair market price of the business as provided for in the agreement for any termination of the agreement by the supplier other than termination for cause . . .”

Former RCW 19.126.040(3)

The arbitrator decided that this statute applied to the immediate circumstances of the Alaskan dispute. Furthermore, it believed that a contractual limitation on the definition of “fair market price” should only be conditionally applied. The arbitrator elected to hear argument on the “fair market price,” determining that an award of more than $5 Million was appropriate.

Unfortunately for Alaskan, Washington courts accord substantial finality to the decision of an arbitrator rendered in accordance with the parties’ contract. Davidson v. Hensen, 135 Wn.2d 112, 118, 954 P.2d 1327 (1998). This leaves very little room for judicial review of an arbitrator’s opinion.

However, the courts can review errors of law. See RCW 7.04A.230. The courts will only review the face of the arbitration award for clearly erroneous rule of law and misapplication of law. Here, they found none.

The court further agreed that the arbitrator had not erroneously found that the dispute arose out of statute. Therefore, ADCO was entitled to recoup its legal fees under RCW 19.126.060.

Its a big loss for Alaskan and a huge win for a distributor. Alaskan had alleged that the contract limited recovery to $1.4 Million value, but because the contract’s limitation was not enforced, damages tripled.

The case illustrates the vast importance of properly crafted arbitration clauses in contracts. RCW 19.126 will be applied to disputes between qualifying brewers. The prior RCW 19.126. applies to all brewers who produce 50,000+ barrels, annually. But, a change to the law in 2009 modified that statute, changing the minimum to 200,000+ barrels. Of course, many brewers are now exempt.

Regardless, consider your current agreement with your distributor. If it was drafted during the old statute’s effectual period, and you produce more than 50,000 barrels, there is cause for concern. A careful brewer should review these regulations with their attorney and find ways to avoid the sometimes severe consequences through smart contracting.

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