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Sixth Circuit Finds Ownership Change Provision in Franchise Agreement Consistent with Ohio Law

The United States Court of Appeals for the Sixth Circuit has reversed a district court's grant of a preliminary injunction enjoining termination of a beer distributor who failed to obtain the brewer's consent before a change of the distributor's ownership. S. Glazer's Distribs. of Ohio, LLC v. Great Lakes Brewing Co., 860 F.3d 844 (6th Cir. June 26, 2017). The parties' agreement required the brewer's written consent prior to any change in ownership of the distributor. Yet, without obtaining consent, the distributor merged with another distributor and requested consent only after a dispute arose. In its motion to enjoin the termination, the distributor argued that the Ohio Alcoholic Beverages Franchise Act distinguishes between the transfer of a franchise and a transfer of ownership interests in the business itself, and by requiring consent only to the transfer of a "franchise," the Act seeks to give distributors free reign to transfer their businesses. The district court agreed, relying largely on a decision issued earlier in a similar case.

The Sixth Circuit reversed, finding that the brewer did not violate the "essence" of the Ohio Alcoholic Beverages Franchise Act, which requires suppliers to exercise "good faith" and "reasonable standards for fair dealing," which were not impermissibly waived by the parties' agreement. The Sixth Circuit distinguished the case on which the distributor and the district court had relied, in which there had been no written agreement. Because the consent provision of the agreement at issue was consistent with Ohio law, the Sixth Circuit found that the distributor was unlikely to succeed on the merits. Further, the Sixth Circuit agreed that the potential harm to the distributor from termination was not irreparable because the contract's liquidated damages provision would provide adequate compensation to the distributor. Recognizing the public interest in enforcement of private contracts, the Sixth Circuit overturned the preliminary injunction and remanded for further proceedings.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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