Dogfish Head v Glunz; The Battle Over “Reasonable Compensation”

In Beer News by Ryan

Lawyers for Dogfish Head and Louis Glunz Distributing are due back in federal court in Chicago today for a status hearing in a tug-of-war over how much Dogfish Head’s beers are worth to Glunz Distributing now and what they would be worth in the future.

Dogfish Head is switching distributors in the Chicago area – something we first reported a few weeks ago – and, according to the Illinois Beer Industry Fair Dealing Act, is required to pay their current wholesaler in order to do so.

“[A]ny brewer that… terminates… any agreement… shall pay the wholesaler with which it has an agreement… reasonable compensation for the fair market value of the wholesaler’s business with relation to the affected brand or brands.”

How much that distributor should get paid is at the heart of the DFH v Glunz case.

According to court documents, Dogfish Head offered Glunz compensation to the tune of 4.8 times Glunz’s most recent twelve-month gross profit earned on sales of Dogfish Head Beer.

Glunz called that offer, “insulting.”

In response, the distributor is requesting “at least” ten times the most recent twelve-month profits.

GuysDrinkingBeer legal analyst Thom Vogelhuber notes this isn’t the first time these two have gone a round or two on reasonable compensation.

[A]ccording to Dogfish Head’s answer, Dogfish Head negotiated with Glunz in 2011 to reduce Glunz’s distributing territory in Illinois, and Glunz accepted 4.0 times twelve-month gross profits for compensation in reducing its distribution territory. Ultimately, Dogfish Head claims it provided two good faith offers and Glunz acted in bad faith by unreasonably demanding compensation well in excess of Dogfish Heads’ offers and failing to provide a reasonable counter-offer to consider.

On October 24, Glunz punched back regarding Dogfish Head’s allegations of bad faith in its own answer. Glunz asserts it never took the position that a 4.0 multiplier reflected “reasonable compensation.” First, Glunz claims the payment of 4.0 times gross profits for Dogfish brands to sub-distributors a year earlier was for a release of distribution rights “… in which no Dogfish products were being sold in and in which it was not likely that they would be sold in the foreseeable future.” Second, Glunz believes this 4.0 payment does not reflect “reasonable compensation” because no distribution rights were acquired or transferred, and the payment was for a different distribution territory than the one at issue in this dispute. Finally, Glunz claims it has not acted in bad faith because “[Glunz] has a professional valuation indicating a value in excess of ten times annual gross profits earned on Glunz’s sale of Dogfish Head Beer.”

Moving forward, Vogelhuber, sees this case as one that would be better off settled sooner rather than later.

Ultimately, this is a dispute that should (and probably will) be settled between the parties prior to any significant pre-trial litigation. Glunz wants to be compensated as much as possible for termination of the Dogfish Head brands distribution rights, while Dogfish Head wants to pay the minimum amount necessary to end the relationship. Protracted litigation will significantly decrease any gain realized by Glunz and Dogfish Heads’ costs will continue to increase while defending this lawsuit.

To some extent this lawsuit may not solely be about amount maximizing the financial compensation that Dogfish Head must provide to Glunz. In its complaint, Glunz comes off as feeling slighted on a personal level. Particularly, Glunz claims it worked “tirelessly” for Dogfish Head over the years; Glunz sacrificed short-term gain by sticking with Dogfish Head, even when Dogfish Head did not provide sufficient inventory; and Glunz invested “hard work, sacrifice, dedication and expenditure of time and money towards the growth and prosperity of Dogfish Head Beer.”

From Glunz’s perspective, Dogfish Head is ending their relationship at a time when sales will increase exponentially because Dogfish Head can now provide sufficient inventory. Glunz wants to be compensated for its brand loyalty and devotion and for perceived future profits, which will not adequately be captured in the market multiplier approach utilized by Dogfish Head. The likelihood of a settlement agreement will depend on the degree to which each side’s interest are aligned in terms of anticipated litigation success, risk avoidance, time value of money, and perceived value of the Dogfish Head brands. Nevertheless, Glunz, at the very least, would benefit from a speedy and amicable resolution. Other brewers, especially craft brewers, may develop a negative perspective of Glunz from its aggressive tactics with Dogfish Head. These brewers may eschew future business opportunities with Glunz to utilize more craft-friendly distributors.

GuysDrinkingBeer is still working to confirm, on the record, which wholesaler(s) have landed Dogfish Head’s beers.

[gview file=”https://www.guysdrinkingbeer.com/wp-content/uploads/2012/10/glunzvdfh.pdf”] [gview file=”https://www.guysdrinkingbeer.com/wp-content/uploads/2012/10/Dogfish-Heads-Answer.pdf”] [gview file=”https://www.guysdrinkingbeer.com/wp-content/uploads/2012/10/Glunzs-Answer.pdf”]

 

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Ryan

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Equal parts beer nerd and policy geek, Ryan is now the curator of the Guys Drinking Beer cellar. The skills he once used to dig through the annals of state government as a political reporter are now put to use offering unique takes on barrel-aged stouts, years-old barleywines and 10 + year verticals.

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