“Frankenstein” Veto Language Interpreted by Federal District Court

Published by on | Permalink

A recent post on this blog noted that wine distributors were not covered by an expansion of the definition of “dealer” under 1999 amendments to the Wisconsin Fair Dealership Law (“WFDL”) due to “a creative partial veto from then-Gov. Thompson.”

That creative partial veto was front and center in a decision and order issued last week by the U.S. District Court for the Eastern District of Wisconsin, denying defendants’ motion to dismiss for failure to state a claim. The plaintiff, Winebow, Inc., had brought a declaratory judgment action seeking to affirm that it could terminate all wine distribution relationships with defendants Capitol-Husting Co., Inc., and L’eft Bank Wine Company Limited without violating the WFDL.

The crux of the defendants’ motion to dismiss was that the 1999 amendments to the WFDL should be interpreted to define wine distributors as “per se dealers” under the WFDL, subject only to limitations on small producers and sales lines constituting less than 5% of a distributor’s business. They contended that the statute covers distributors of “intoxicating liquor” as defined in section 125.02(8) of the Wisconsin Statutes, regardless of whether such distributors can meet the “community of interest” test ordinarily required for dealer status.  Defendants noted that the WFDL definition that provides per se dealer status to distributors of intoxicating liquor defines “wholesalers” with reference to section 125.02(21) of the Wisconsin Statutes, which definition does not exclude wine wholesalers.

The WFDL, however, defines “intoxicating liquor” as having “the meaning given in s. 125.02(8) minus wine.”  The words “minus wine” were inserted via Gov. Thompson’s use of what was dubbed a “Frankenstein veto,” with many other words in succeeding clauses of the legislation deleted by his veto pen, leaving only “minus” and “wine” in place. The District Court denied the motion to dismiss, finding that “[t]he statutory definition of “intoxicating liquor” is clear, and wine is expressly excluded.”

Other arguments in this case, however, may also prove to be instructive. The plaintiff’s complaint seemingly alleges that the “minus wine” language means that all wine distribution agreements are exempt from coverage under the WFDL – even if the parties’ relationship satisfies the community of interest test of section 135.02(3)(a).  The complaint states the defendants’ wholesale distribution of Winebow portfolio wines does not qualify for protection under the WFDL “as wine is expressly exempt from the WFDL.”  Plaintiff’s contention was not directly at issue in the defendants’ motion to dismiss, but presumably would be raised in a motion for summary judgment or for judgment on the pleadings.

A Textbook Example of the Grey Market

Published by on | Permalink

Out of the scores of disputes that arise with respect to “grey market” distribution channels, what are the odds that a case involving a Thai student doing business as “bluechristine99” on eBay would reach the U.S. Supreme Court?

“Grey market” refers to the sale of genuine branded products outside of established distribution channels established by a manufacturer. A manufacturer may provide different price structures to different markets and customers.  These price differentials create an opportunity for brokers and distributors to purchase products at discounted rates, but sell them in places where they can realize greater profits – in places not intended by the manufacturer. One example is the sale of on-line prescription drugs from Canadian distributors to individuals located in the U.S. The drug manufacturer sells the medications at a lower wholesale price in Canada; distributors take advantage of that lower price and resell over the internet and ship to U.S., thus undercutting retail prices charged in the U.S.

The “bluechristine99” case decided by the U.S. Supreme Court in March involved a textbook example of the grey market -- literally.  A student at Cornell University, Supap Kirtsaeng, had friends and family purchase English-language textbooks (which had been printed overseas) in Thailand and mail the textbooks to him in the U.S.  Using eBay as his distribution channel, Kirtsaeng re-sold the books at a profit.

The holder of the copyrights in the textbooks, publisher John A. Wiley & Sons, sued Kirtsaeng for copyright infringement, citing its exclusive right to distribute the copyrighted materials in the U.S.  Kirtsaeng asserted a defense based on the “first sale” doctrine of U.S. copyright law. Under that doctrine, the owner of a particular copy of copyright materials lawfully made under U.S. copyright law is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.

In the Kirtsaeng case, the issue was relatively narrow. The U.S. Supreme Court had previously held that goods manufactured in the U.S. and sold overseas were subject to the first sale doctrine, and thus the manufacturer could not bar subsequent sales of goods re-imported into the U.S. by asserting copyright infringement. In Kirtsaeng, the textbooks had been printed overseas, and not in the U.S.  The District Court and court of appeals found that distinction to be meaningful. But the U.S. Supreme Court did not. It overturned the district court’s finding of copyright infringement against Kirtsaeng, holding that the first sale doctrine defense applied to re-sales of copyrighted materials lawfully produced overseas.

The co-opting of distribution channels by brokers such as Kirtsaeng is only a part of the grey market problem in the distribution industry. Many grey market disputes involve parties who voluntarily have partnered to do business. Distributors and brokers may resort to buying or selling on the grey market for benign reasons (selling excess inventory at below-market prices, acquiring products on the grey market to meet customer demand when the manufacturer cannot deliver) or because they are engaging in more nefarious practices (falsely representing the identity of the end user to obtain additional discounts, exploiting pricing differentials between jurisdictions).

Whatever the reason for the practice, the grey market can damage a manufacturer.  There is the risk that items sold on the grey market are actually low-quality counterfeit goods that wind up disappointing the end user, hurting the goodwill of the legitimate brand and manufacturer.  If the goods aren’t purchased from an authorized dealer, there may be no warranty from the original equipment manufacturer.  Finally, those distributors who buy within established channels suffer financially while those bending the rules are rewarded, damaging the strength of the distribution system.

Addressing these issues can be difficult, especially for manufacturers without significant market power and who rely on large distributors to sell their products.  Contractual protections in distribution agreements are a critical starting point of any effort to curb grey market practices.