Purpose

Modifies the terms for franchise agreements between suppliers and wholesalers in the liquor industry.

Background

The Arizona liquor industry generally operates under a “three-tiered system” for liquor distribution. This refers to a system where the three layers of the industry – suppliers, wholesalers and retailers – are prohibited from being affiliated with one another. It provides that a supplier must distribute its products through licensed wholesalers, who then promote and sell the product to retail licensees within the state.

The Arizona Spirituous Liquor Franchises Act was enacted in 1974 to regulate the contractual relationship between suppliers and wholesalers in the liquor franchise industry. According to Alliance Beverage Distributing, current statute may be interpreted in a number of ways that could negatively effect the parties negotiating agreements in today’s marketplace. For instance, Alliance Beverage Distributing indicates that current statute may be interpreted to require renewal of franchise agreements at all times, even when the parties have negotiated a fixed-term duration contract, or unless both good cause and good faith exist as a basis for terminating the agreement. Current statute may also be interpreted to require parties to remain in a commercial relationship after the negotiated terms have expired, or to require a party to stay with a supplier or wholesaler who is working with a direct competitor of the party.

The strike everything amendment to S.B. 1501 allows parties to agree upon a specific time period for the length of the franchise without requiring the relationship to be renewed upon the expiration of that time. It also permits either party to terminate the relationship as long as the termination was consistent with the contract, conducted in good faith or with good cause.

The strike everything amendment to S.B. 1501 also exempts beer wholesalers and beer suppliers from the proposed statutory changes. Unlike the wholesale market for wine and spirits, which has several wholesalers representing multiple suppliers, the wholesalers for beer typically represent one significant supplier. Due to the differences in the marketplace for beer wholesalers versus wholesalers of wine and spirits, Alliance Beverage Distributing indicates that the proposed statutory changes will not have the same positive effect on competition and commercial practices as applied to beer wholesalers and suppliers.

There is no anticipated fiscal impact to the state general fund associated with this measure.

Provisions

1. Eliminates the requirement that suppliers or wholesalers renew their spirituous liquor franchise agreements.

2. Allows termination or cancellation of a spirituous liquor franchise agreement to be done in either good faith or for good cause. (Current law requires both standards to be met for termination or cancellation.)

3. Maintains current law relating to franchise agreements as applied to beer wholesalers and beer suppliers.

4. Defines terms.

5. Makes technical and conforming changes.

6. Provides for a general effective date.

Amendments Adopted by Committee

1. Adopted the strike everything amendment.

2. Maintains current law relating to spirituous liquor franchise agreements as applied to beer wholesalers and beer suppliers.

3. Makes conforming changes.

Senate Action

COM 3/7/01 DPA 5-0-1-0

JS/ac